The Bank of Canada has cut interest rates for the first time since April 2004, saying that the global economic outlook looked uncertain.
The Canadian dollar fell on news of a rate cut
It cut rates by a quarter of a percentage point to 4.25% from 4.5%.
The central bank said that it expected financial market turmoil, stemming from a collapse of the US sub-prime mortgage market, to persist.
Canada's surprise cut raised the chances of a cut in interest rates by the Bank of England, analysts said.
Canada's central bank said that credit costs in the country had tightened and it expected a slowing US economy to suppress demand for Canadian exports.
The rate cut weakened the Canadian dollar, which fell sharply against the US dollar, and may help boost demand for exports as they were now cheaper.
The Bank of England is due to announce its decision on interest rates this Thursday after a two-day meeting of its Monetary Policy Committee.
Most economists had expected rates to remain at 5.75% but analysts on Tuesday said Canada's move had made the decision a tighter call.
"The Bank of Canada...surprised the market and came out with a cut, and probably this is increasing the odds in the market that the Bank of England will also act," said Sebastien Galy, a currency analyst at Dresdner Kleinwort.
The European Central Bank also meets on Thursday to decide on interest rates for the 13 nations that use the euro.
It is expected to keep rates on hold at 4%.
The Federal Reserve is expected to cut US rates by a quarter of a percentage point next week, with some analysts forecasting a larger half-a-percentage point cut.