The Bank said it would cut the discount rate to 3% from 3.5% on 28 December 28 - four days before the European Central Bank in Frankfurt takes over monetary policy control in the euro zone.

The bank said: "This measure is in accordance with the decisions of the European Central Bank council on 22 December, 1998, concerning the marginal lending and deposit rates...for national central banks."

The decision was hailed by political and business leaders as the start of a new era and as a much-needed spur to the Italian economy.

Prime Minister Massimo D'Alema said: "With this decision, our country comes to the end of a long and arduous path it took, conscious of the importance of the new European challenge."

Odd one out

Italy was the only country about to join the euro that did not participate in the co-ordinated rate cut to 3% on December 3 to smooth the launch of the currency.

Instead, Italy's central bank governor Antonio Fazio lowered the country's discount rate by 0.5 percentage points to 3.5%.

Mr Fazio was rumoured to have ruffled feathers among European Central Bank (ECB) officials for preferring to maintain an independent line.

ECB President Wim Duisenberg said he did not "particularly like" the decision.

Some analysts suggested that Mr Fazio wanted to make the point that individual central banks would still have a say after the launch of the euro.

Economists said his decision also sprang from a fear that speculators could attack the lira in the last weeks leading up to the launch of the new currency.

Mr Fazio has said in the past that cutting euro zone interest rates below 3.3% would do little to stimulate growth and that this was an exceptionally good level for Europe.

The cut in rates is tenth by the Italian central bank since 1995 when they stood at 9%.

The highest rate set by the Bank of Italy since the end of World War Two was 19% in March 1981.

The rate cut will also be a bonus to the government which has huge debts to pay.