By Martin Crutsinger
The Associated Press

WASHINGTON - The Federal Reserve left interest rates unchanged Tuesday but signaled that cuts could be coming, given worries about the economy's uncertain recovery and the possibility of a destabilizing fall in prices.

Many analysts said an unusually detailed statement by Federal Reserve chairman Alan Greenspan and his colleagues convinced them that the central bank would cut rates at its next meeting June 24-25 if the economy hasn't started to post stronger growth.

"By June, I think there will be hints of an economic rebound, but it will be a highly uncertain thing, and the Fed does not want to take any chances here," said economist David Jones, the author of four books on the Greenspan Fed.

The Fed has not reduced its target for the federal funds rate, the interest that banks charge each other, since Nov. 6, when it slashed it by a half-point to a 41-year low of 1.25 percent, the 12th reduction in an aggressive easing campaign that began in January 2001.

In its statement explaining the decision to leave rates unchanged, the Fed mentioned recent disappointing statistics on employment and factory production, although it said that data "was mostly reflecting decisions made before the conclusion of hostilities."

With the end of the Iraq war, oil prices have fallen and consumer confidence and financial markets have rebounded, the Fed said, observing that this should "foster an improving economic climate over time."

However, the central bank's statement noted a remote concern that the United States, which has been struggling for three years to overcome the bursting of the U.S. stock market bubble, could go the way of Japan and encounter a bout of falling prices.

Japan, which saw real estate prices fall in the late 1980s, has been mired in more than a decade of weak growth compounded now by a prolonged bout of deflation - falling prices.

Economists view deflation as a far more serious threat than inflation because interest rate changes have only a limited impact once a deflationary spiral begins. America's last bout of deflation occurred during the Great Depression of the 1930s.

" At its last meeting on March 18, the Fed had refrained from offering a risk assessment, on grounds there were too many uncertainties in the period before the Iraq war.

Analysts said that by switching the risk statement toward weakness and noting the possibility of deflation, the Fed was giving a clear signal it was prepared to cut rates further and do whatever else it could to boost growth and keep deflation from setting in.

"The Fed is determined not to repeat the mistake of the Bank of Japan, which waited too long to fight deflation," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

On Wall Street, the Dow Jones industrial average initially surged on the prospect of further rate cuts, with the Dow Jones industrial average rising by more than 100 points. However, a wave of profit-taking cut that gain to 56.79 with the Dow closing at 8,588.36.

Holding the funds rate steady means commercial banks' prime lending rate will also remain unchanged at 4.25 percent, the lowest level since May 1959.