THE Federal Reserve - the US central bank - gave ailing stock markets on both sides of the Atlantic a tonic last night by keeping key interest rates steady.

Joseph Coyne, a spokesman for the Federal Open Market Committee in Washington, said the overnight Fed funds rate, which determines borrowing costs throughout the American economy and sets the standard for global rates, remained unchanged at 5.5%.

The discount rate, at which the Fed extends emergency loans to commercial banks, was left at 5%.

The statement, although widely expected by financial markets, still came as a relief to Wall Street equity analysts, traders and strategists. The Dow fell 20 points after the news but quickly recovered and headed higher.

Although the decision came too late for the UK exchange, London blue chips rose earlier on the expectation that the Fed would hold the line on rates. Both markets had chalked up substantial losses in recent days as interest-rate jitters gripped investors.

''The Fed doesn't seem to be the enemy right now,'' said Doug Myers, vice-president of equity trading at Interstate/Johnson Lane, a US brokerage.

Before the announcement, US analysts said Federal Reserve chairman Alan Greenspan was acutely aware that a tightening now could be a difficult sell politically to anybody outside the economics profession.

Some also argued that higher rates could speed the exodus of capital from crisis-ridden Asia.

Fed watchers speculated that the chairman faced opposition from several of his colleagues who would be worried that strong growth rates and a drop in the unemployment rate to a 28-year low of 4.3% might cause inflation to rise.

The US economy grew at a brisk 4.2% in the first quarter, but recent signs that manufacturing was slowing - because of a drop in exports to Asia - might help to keep a lid on growth over the second quarter.

Whether that will be enough to cool off the labour market is yet another question.

The next Federal Reserve meeting is scheduled for June 30 and July 1, by which time the central bank will have a better idea of the economy's most recent performance.

''By the June-July meeting, the odds of a tightening are higher,'' said Lyle Gramley, a former senior Federal Reserve official.

Official rates have been steady since March 1997, when the Fed raised its key overnight rate by a quarter-point to 5.5%.