By Martin Crutsinger
The Associated Press

WASHINGTON - With looming war making economic forecasting unusually difficult, the Federal Reserve decided Tuesday to leave interest rates unchanged at a 41-year low.

Federal Reserve Chairman Alan Greenspan and his colleagues held out the prospect, however, that they would move quickly to cut rates if fallout from military conflict should threaten to push the country back into recession.

The Fed's decision to leave its target for the federal funds rate unchanged at 1.25 percent disappointed investors who had been hoping the Fed would cut rates again, driving the funds rate to 1 percent or lower, a level last seen when Dwight Eisenhower was president.

Stocks, surging in recent days over hopes of a quick and successful war against Iraq and a possible Fed rate cut, momentarily lost altitude after the Fed's afternoon announcement. However, the Dow Jones Industrial Average managed to finish the day up 52.31 at 8,194.23, extending a rally that has added 670 points to the blue chip average over the past five trading days.

Many investors had been hoping that the Fed would at least change the portion of its statement designed to foreshadow future moves.

They had expected a move from a statement that risks were equally balanced between inflation and economic weakness to one that cited economic weakness as the greater threat.

Instead, for the first time since it began releasing a "balance of risks" assessment in early 2000, the Fed said the "unusually large uncertainties clouding the geopolitical situation" made it impossible to determine where the risks stood.

The 12-member Federal Open Market Committee, composed of Fed board members and regional Fed bank presidents, said it would engage in "heightened surveillance" of economic developments in coming weeks. Analysts read that as a signal the central bank won't wait until its next meeting May 6 to cut rates further if needed.

"The Fed will pull out all the stops if there is a threat of a double-dip recession," economist David Jones said. He predicted a rate cut could come as early as mid-April if the economy weakens further.

There have been a string of reports in recent weeks indicating the economy, which endured a stop-and-go recovery through 2002, was slowing in recent weeks under the impact of rising oil prices and business and consumer jitters about a possible war in Iraq.

The Fed said as those uncertainties lift, the current environment of low interest rates and strong gains in productivity should be enough to spur stronger economic growth.

Stuart Hoffman, chief economist at PNC Financial Group, said Fed policy-makers still believe, "If we get the war and high oil prices out of the way, the economy can probably improve without any additional rate cuts."