Washington  - The US economy appears to be contracting at a slower rate than in previous weeks in a sign that it is beginning to stabilize, the US Federal Reserve said Wednesday.

But the Federal Reserve warned that economic activity is likely to remain "weak for a time" and decided to keep the interest rate unchanged at 0-0.25 per cent from its last meeting in March.

The Federal Reserve meeting came hours after the US Commerce Department issued its quarterly report showing the economy continued to shrink during the first three months of the year.

The 6.1-per-cent annual contraction rate capped the worst six- month performance in five decades, and followed a 6.3-per-cent figure for the final three months of 2008.

Signs of stability in household spending coupled with an easing of conditions on financial markets along with emergency steps taken by the Federal Reserve and government provide some hope the economy is emerging from the deep recession that began in December 2007.

Consumer spending, which makes up about two-thirds of economic output, actually increased 2.2 per cent in the quarter after a 4.3- per-cent drop in the final three months of 2008, but was one of the very few bright spots in the Commerce Department report.

The housing sector shrank 37 per cent and exports plunged 30 per cent. Government spending, which has propped up the economy in other quarters, fell 4 per cent as many states sought to cut back on expenditures.

Company inventories plummeted by 103.7 billion dollars, the sharpest drop since 1947. But economists said the smaller stockpiles, coupled with an uptick in consumer spending, could set the stage for a recovery in the coming few months.

Prices dropped 1 per cent in the quarter, compared to a 3.9-per- cent drop in the last three months of 2008.

The report comes ahead of a Federal Reserve meeting later Wednesday to consider further measures to stimulate the economy. The US central bank is expected to keep its benchmark interest rates at 0 per cent. (dpa)