The Federal Reserve, concerned that the U.S. economy may have entered a recession, has cut short-term interest rates by a quarter of a percentage point for the second time in less than three weeks.

The Fed's action, coupled with news that inflation moderated slightly last month and further signs that the economy is weakening, prompted a drop in long-term interest rates as well. Yields to investors in long-term government bonds fell to 8.45 percent, their lowest level since before Iraq invaded Kuwait on Aug. 2, an act that triggered a collapse of consumer and business confidence and a new burst of inflation.

Analysts said the decline in rates, which the Fed hopes will help stem the economy's fall, should mean banks will soon cut their 10 percent prime lending rate. A drop in the prime rate would lower interest payments on most business and many consumer loans, such as those on home equity loans, which are tied to the prime rate.

The improved inflation news came from the Labor Department, which reported yesterday that rising oil prices drove the overall consumer price index up last month by 0.6 percent, a hefty increase but one smaller than the 0.8 percent increases in August and September. Gasoline prices rose 7.7 percent in October and are up 26.9 percent in the three months since the Persian Gulf crisis that sent crude oil prices skyrocketing.

Meanwhile, the Commerce Department said the nation's merchandise trade deficit declined by 3.3 percent to $9.4 billion in September, its lowest level since June. Imports dipped despite a jump in the value of foreign oil brought into the country. It was a further sign, some economists said, that the economy is slowing.

Top Fed officials decided at a meeting here Tuesday to lower the Fed's target for the key federal funds rate, the interest rate banks charge one another for overnight loans, from 7.75 percent to 7.5 percent, sources said. The central bank began to seek to drive down the rate by adding cash to the nation's banking system on Thursday, but its intention to reduce the rate became clear yesterday when it did the same thing again.

Even with all the recent bad news about the economy, such as mounting layoffs and falling production, there was no indication that the Fed is committed to reduce rates further.

For one thing, top Fed officials are unusually divided over whether the central bank's top priority at the moment ought to be stemming the economic slide or continuing to fight inflation.

The Fed yesterday released the record of the Oct. 2 meeting of the Federal Open Market Committee (FOMC), the central bank's top policy-making group, at which the previous quarter-point cut in the federal funds rate was agreed to. The policy record showed that three of the 11 members of the committee opposed that reduction, while one, Martha Seger, wanted a much more vigorous move to ease credit.

The dissenters, Wayne Angell, Lee Hoskins and Robert Boykin, feared that by "paying close attention" to the immediate signs of a weaker economy, the FOMC "risked losing sight of its fundamental objective of controlling and ultimately bringing down inflation," the policy record said.

The Labor Department price report said housing costs, which account for more than two-fifths of the consumer price index, rose 0.3 percent last month, down from 0.4 percent in September and half the average 0.6 percent rise in the June-August period.

The housing component of the index rose less despite a 1.2 percent increase in the cost of household fuels and utilities. Home heating oil prices increased 12.8 percent for the month and 50.8 percent in the last three months, the department said.

Food and beverage prices also rose 0.3 percent last month, the third such monthly increase in a row. Volatile apparel prices, which had gone up 0.7 percent in September, fell 0.2 percent. Entertainment costs, up 0.8 percent in September, rose 0.1 percent last month. And medical care costs continued to go up at a 10 percent annual rate.

The Commerce Department's trade report said that the deficit would have narrowed more than it did except for the large increase in the cost of imported oil, a direct consequence of the Iraqi invasion. There was a $2 billion decline in the trade deficit in manufactured goods, for example.

Analysts said both the 2.4 percent decrease in imports, to $41.3 billion, and a drop in the amount of oil brought into the country are indications of an economic slowdown.

"These numbers are a fairly strong demonstration of the downturn in the American economy," said William T. Archey, international vice president of the U.S. Chamber of Commerce. The sharpest decline in imports came in the area of capital goods -- the machines used to make other products -- which American Business Conference President Barry K. Rogstad said, "suggests stagnating investment in our manufacturing sector."

Rogstad said some businesses may be cutting their investment plans because exports of U.S. goods, one key source of economic growth this year, are "tailing off." With fewer orders for exports, fewer new machines are needed to make them.

Exports declined 2.2 percent in September, to $31.8 billion, as foreigners bought fewer American-made cars and industrial supplies and less food. But exports of U.S. capital goods increased.

Rogstad noted a trend of declining exports over the past three months. "Reversing that trend will be indispensable for domestic economic growth," he said. Walter Joelson, chief economist for General Electric Corp., said that exports account for more than two-thirds of economic growth this year.

The United States showed sharp improvements in its trade balances with two of its major trading partners -- Japan and the European Community.