The European Central Bank has put up interest rates by 0.25% to 3.25%.

The move, which surprised many analysts, comes as the euro is reaching new lows.

The ailing currency has fallen 17% against the dollar since its launch at the beginning of last year.

ECB president Wim Duisenberg has repeatedly expressed confidence in the euro's fundamental strength.

But earlier this week he said a continuous weakening could pose a risk to price stability.

That could lead to eurozone inflation going through its 2% ceiling.

The decision to put rates up was made at a closed-door meeting of the ECB's governing board, the officials who set monetary policy for the 11 countries using Europe's common currency. The increase will take effect from 9 February.

It came earlier than many analysts had expected - normally the markets were prepared in advance, said one.

But Mr Duisenberg argued that his earlier comments had paved the way for the rise.

Inflation risk

He said the risk of inflation due to rising oil prices and the growth in the amount of money in circulation both contributed to the decision.

But he emphasised that the root cause of European inflation was not a weak local economy, but a strong US economy.

He agreed that the weakness in the euro had played a role, but said it had not been the overwhelming factor.

"Inflation rates are now approaching higher levels than expected earlier, and larger and more protracted commodity and producer price increases are heightening the risk of second round effects," said Mr Duisenberg.

"Against this background it is crucial for wage negotiators to be able to rely on the maintenance of price stability in the medium term."

Investment returns boosted

But some observers fear that the rise could depress the eurozone economy just as it is beginning to pick up.

Raising interest rates tends to buoy the local currency by boosting returns on investments in bonds denominated in euros.

But it also cools off an overheated economy by making it more expensive to borrow money.

This is the second time the ECB has raised rates in its short history - in November they went up by half a point.

There had been speculation that the ECB might hold off for the moment because the US Federal Reserve, which is also worried about inflation, raised short-term interest rates on Wednesday.

The Fed added a quarter-point to its lending rate, taking it to 5.75%.

'Not decisive enough'

Some analysts felt the ECB's move was not enough.

"They should have waited and done 50 basis points," said Adrian Schmidt of Chase Manhattan in London.

"The danger is that the markets will see this as a move to protect the euro. The markets would rather see nothing or 50. I think they would rather see something decisive."

David Brown of Bear Stearns in London agreed. "Basically they are biting the bullet on taking a proactive policy," he said.

"Really everything in euroland says they should be doing more - the boom conditions in the economy, rising inflation risk, explosive credit demand and weak euro."

The euro slipped further against the dollar on news of the increase before regaining some ground.