The US economy grew at its weakest pace for four years during the first quarter of 2007, figures from the US Commerce Department show.
A housing market slowdown weighed on growth
The news pushed the dollar to record lows of $1.3667 against the euro.
US gross domestic product (GDP) grew at an annual rate of just 1.3% in the first three months of the year, down from 2.5% in the previous quarter.
Separately, the University of Michigan consumer sentiment index also fell, but not as much as had been feared.
Its consumer sentiment index slid to 87.1 in April from 88.4 in March, which was the third fall in a row.
But the latest figure had been expected to be even worse - the preliminary reading for April was 85.3.
The final result was boosted by optimism about the current rally on Wall Street.
"We got a better-than-expected number amid several months of disappointing news," said Michael Woolfolk from The Bank of New York.
"This is the first ray of sunshine befitting a dreary April," he added.
The Commerce Department blamed the slowdown in growth on a slump in the housing market and America's widening trade gap.
US exports declined at a rate of 1.2% in the January to March quarter, while imports rose 2.3%, helping to drag output figures lower.
GDP - which measures the value of all goods and services produced in a country - is considered the best measure of the economic health of the US.
The latest figures were considerably worse than earlier forecasts of 2% growth, and triggered fears for the future of the world's largest economy - pushing the dollar lower against the euro.
On Wednesday, the latest Beige Book - which measures regional economic data - recorded only "modest" growth across the country since February.
Concerns over the housing market and related sub-prime mortgage market have also taken their toll. Earlier this week, figures showed sales of non-new US homes dropped 8.4% in March.
Some analysts fear a sharp drop in the housing market, along with a weak manufacturing sector, could trigger a US recession.
Data earlier this week from the Conference Board survey also showed US consumer confidence fell to its lowest level since August last year.
However, despite widespread concern over the future of the US economy, central bank chief Ben Bernanke has said he does not expect the US to slide into recession this year.
His comments contrasted with comments from former Federal Reserve chief Alan Greenspan who put the chances of a recession at one in three.
The Federal Reserve has long been battling a tough balancing act with its rates decision - trying to rein in inflation without cutting into growth.
As a result, US rates have remained on hold at 5.25% since August last year.
But the latest figures could cause more problems for the Fed, as while growth has slowed, inflation increased during the first quarter.
The Fed's preferred inflation rate, which strips out volatile food and energy costs rose 2.2% during the first three months of the year, up from 1.8% in the previous quarter.
The rise comes despite Fed signals that it believed inflation had eased slightly .