WASHINGTON – The Federal Reserve, faced with an economy that went from bad to worse after the terror attacks, cut a key interest rate Tuesday by a half-point, driving it down to a level not seen since 1962.

The rate cut, the ninth this year, is aimed at getting consumers and businesses – whose confidence has been badly shaken by the Sept. 11 attacks – to spend and invest to keep the economy from becoming even weaker.

After a closed-door meeting, Federal Reserve Chairman Alan Greenspan and his colleagues announced they were cutting the target for the federal funds rates, the interest banks charge each other on overnight loans, to 2.50 percent, the lowest level since May 1962.

In response, JP Morgan Guaranty, Chase Manhattan and Bank of America were among the commercial banks reducing their prime lending rates, the benchmark for millions of consumer and business loans, by a half-point to 5.50 percent, the lowest since Oct. 3, 1972, when the prime rate matched that level.

On Wall Street, stocks rose in a last-minute rally that overcame investors’ initially lukewarm response to the Fed’s action. The Dow Jones industrial average closed up 113.76 points at 8,950.59, according to preliminary calculations. Nasdaq, meanwhile, rose 11.83 points to 1,492.29.

In Maine, consumers are confused about what to do with their money these days. Too much competing information, along with pleas for patriotism and a return to normalcy, is making it difficult for them to make sound financial decisions, said Don Hagstrom, a financial adviser with American Express Financial Advisors Inc. in Bangor.

“Logic and common sense are playing tug of war with people’s emotions,” said Hagstrom. “If you look at it logically, there’s a huge sale in the stock market right now.”

But, he countered, if consumers were to look at it a different way, stock markets shouldn’t have been going up the past few days, given recent corporate announcements of low profits and massive layoffs.

“It’s neck and neck every day,” Hagstrom said. “One eventually will win out – the continued influx of bad news or the coming to the rescue.”

With American flags lining Hogan Road in front of the Van Sykle Lincoln Mercury Kia dealership in Bangor, Russell Spittle of Mars Hill on Tuesday was waiting for financing to come through to buy a new vehicle. Earlier this year, he said, he wouldn’t have bought a new car. Low interest rates have changed his mind.

“Right now, you can get more for your dollar as far as I’m concerned,” Spittle said.

Donna Berry of Bucksport, carrying American flags she purchased at Kmart, said she is confident the economy will come back, “but it won’t be anytime soon.” Still, the interest rate cuts this year should convince consumers to take advantage of the bargains that mortgage companies, stores and auto dealerships are offering to boost sales.

“You can go refinance your home now and make tons of money,” Berry said. “But I think people may be too jittery to do that.”

Yet some people are refinancing or buying new homes, said Bob Norris of Sun Mortgage Co. in Bangor. Mortgage rates in recent days have been near 63/4 percent, he said.

“People are definitely coming in and refinancing in increasing numbers,” he said. “Their wish is to get the lowest rate and hope that it goes even lower.”

Reflecting possible action in the future, policy-makers maintained that their chief concern is the weak economy, leaving the door open to further interest rate reductions.

“The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future,” the Fed said. Still, policy-makers said the long-term prospects for the economy remain favorable.

Wells Fargo chief economist Sung Won Sohn said the Fed is “setting the stage for an eventual economic rebound hopefully sometime next year. So by saying that the long-term economic outlook is good, the Fed is hoping that we are more likely to go out and buy things, fly on an airplane and purchase stocks.”

The Fed also cut its discount rate, the interest it charges to make direct loan to banks, by a half-point to 2 percent, matching the level of Nov. 6, 1958.

Before the attacks, consumers, whose spending accounts for two-thirds of all economic activity, were a key force keeping the economy afloat. Much of the economy’s weakness has come from businesses sharply cutting capital spending. Economists now worry that consumers will close their pocketbooks and companies will trim spending even more.

In the aftermath of the attacks, consumer confidence has plunged by the largest amount since the 1991 Persian Gulf War. Billions of dollars’ worth of business have been lost, and layoffs have rocketed to a nine-year high.

Some Maine consumers lately haven’t been afraid to make big-ticket purchases, but could be holding back on smaller, incidental ones, said James Dowe, president of Bangor Savings Bank. The number of customers taking out loans is increasing, he said.

“It’s been going on a little surprisingly even through these trying times,” Dowe said. “So far, the signs that we have seen is people are going about their business, in a big-purchase kind of way.”

But the indicator that consumers aren’t making as many smaller purchases is an increase in the amount of money being deposited into accounts.

“They’re putting a little more money aside,” Dowe said.

Some people aren’t spending as much because they’re concerned they may lose their jobs, said Tim Murphy, an insurance salesman in Bangor.

Phil Canfield of Corinth, who works with Murphy, said he isn’t as worried.

“I just bought a 43-inch TV,” he said. “How’s that for consumer confidence? I think basically the U.S. is sound. The economy is sound, and it will come back.”

The Fed’s last rate cut of a half-point came on Sept. 17 in a between-meetings move the morning the stock markets reopened after a four-day shutdown.

The rate reductions, analysts said, probably won’t prevent the economy from tipping into recession this year but they may keep a downturn from being prolonged.

Given the economic fallout from the attacks, many economists believe a recession is now unavoidable. The economy, as measured by the gross domestic product, barely grew in the second quarter, expanding at a rate of just 0.3 percent, the weakest performance in more than eight years.

Many analysts are predicting the second quarter will turn out to be the last quarter of economic growth this year.

The Blue Chip Economic Indicators consensus expects the GDP to shrink by 0.5 percent in the July-September quarter and decline by 0.7 percent in the final three months of the year before returning to growth early next year. A recession is commonly defined as two consecutive quarters of declining GDP.

Jeannine Aversa of The Associated Press and Deborah Turcotte Seavey of the Bangor Daily News wrote this report.