Mumbai: The European Central Bank raised its benchmark euro zone interest rate by 25 basis points to 4.25 per cent, for the first time in more than a year, amidst rising concerns over inflation.

ECB's 21-member governing council meeting in Frankfurt opted to lift its key interest rate by 25 basis points to 4.25 per cent even as growth across the 15-nation euro-zone showed continued signs of slowing.

ECB president Jean-Claude Trichet had last month announced that a small rise in interest rate was possible in July. But analysts, citing some ECB policy makers, said the central bank is likely to announce a series of hikes to tame inflation.

Markets are betting on rates hitting 4.5 per cent by year-end even as Germany, France and Spain have urged caution amidst economic data that has taken a turn for the worse.

Europen economies are in stagflation - low growth amidst high inflation - an obvious risk to ECB policy makers and the European economy, according to European Union monetary affairs commissioner Joaquin Almunia.

Data show that manufacturing and services activity in Europe contracted in June for the first time in three years amidst a weakening of business and consumer confidence.

Inflation in the 15-nation euro zone accelerated to a new record 4.0 per cent, fed both by oil prices that hit a new record above $145 per barrel and a wage spike.

Trichet is holding a news conference to explain the decision.

With the Federal Reserve holding US interest rates until late in the year, the ECB decision will push the euro up further against the dollar, making higher-yielding euro-zone investments more attractive.

Meanwhile US treasury secretary Henry Paulson, speaking in London, agreed that inflation was becoming the top economic focus of many countries around the world as oil and food prices take their toll.

"When you look around the world broadly, I think inflation is the issue that, as I go around the world, is getting the number one focus, getting the number one focus," Paulson said in a television interview with BBC Newsnight.

"When you look at not just oil prices, but food in areas where there's poverty, this is a huge problem," Paulson, who is in the last leg of a five-day trip to Russia, Germany and Britain, told Newsnight.

But, for the United States and Britain, the downturn in the economy is a greater worry than inflation at the moment, Paulson added.