LONDON, OCT. 5 -- Prime Minister Margaret Thatcher's government, in a sharp reversal of both economic policy and long-standing political ideology, agreed today to tie the British pound to the European Community's exchange rate mechanism.

The move, which was coupled with a decision to cut interest rates by 1 percentage point, was expected to give at least a short-term boost to Britain's flagging economy, which has been pushed toward recession by double-digit annual interest and inflation rates.

It is also likely to boost the political standing of Thatcher's Conservative Party, which holds its annual conference next week trailing the opposition Labor Party in the polls largely because of its purported economic mismanagement.

By effectively pegging the pound to the German mark, Thatcher has ceded some of Britain's sovereignty in making economic decisions in return for the prospect of higher growth and lower inflation similar to what West Germany has achieved during the past decade.

The mechanism is designed to stabilize currency fluctuations among member states and keep down interest rates and inflation. In proposing to join at a rate of 2.95 German marks per pound, Britain has agreed to maintain its currency within 6 percent above or below that figure.

Thatcher's move is one she had fiercely resisted for months despite strong pressure from the hard-hit British business community and from pro-European forces within her own party.

Two senior Cabinet ministers -- chancellor of the exchequer Nigel Lawson and foreign secretary Geoffrey Howe -- either resigned or were removed from office after pressing Thatcher to join the exchange rate mechanism. But party insiders say Thatcher's opposition was gradually eroded by steady persuasion from the two men's successors, John Major and Douglas Hurd, and by economic realities.

Thatcher had insisted Britain would not join until its inflation rate, currently 10.6 percent, dropped toward the level of other European states, which is in the 5 percent range. For months the government instead has relied upon a politically unpopular policy of enforcing punitively high interest rates of 15 percent to throttle consumer spending and force down inflation.

So far the policy has not seemed to work; the inflation rate has risen all during the year. But Thatcher denied that today's decision was a reversal of policy, claiming to the contrary that it had been possible because the underlying causes of inflation had been reduced. She insisted the inflation rate would soon begin to fall.

"The fact that our policies are working and are seen to be working have made both these decisions possible," she told a news conference. "The most important thing is to get inflation down and these two policies are right for the times."

Both she and Major denied today's moves had anything to do with electoral politics. But political opponents, while welcoming the decision, charged it was designed for a short-term economic benefit that would allow the Conservatives to call an election sometime next year. "If it isn't done for that intention, the coincidence is almost beyond belief," said Roy Hattersley, deputy leader of the Labor Party.

The move gave an immediate boost to Britain's anemic economy. The London stock market soared 100 points and British sterling shot up 5 cents against the U.S. dollar and climbed above 3 German marks.

But the longer-term benefits of entering the exchange rate mechanism are less certain. Lawson as chancellor conducted a trial run three years ago by shadowing the mark for almost a year. Toward the end, he had to cut interest rates drastically to lower the pound's value in line with the mark, a move he later conceded had helped heat up Britain's economy and trigger the present high inflation.

Chase Investment Bank warned today that joining the EC mechanism would not in itself stabilize the economy. "There has been very little evidence of an improvement in inflation expectations during the first four or five years simply by joining," said the bank.

The move is certain to be seen as a British concession, albeit belated, to European monetary union. But Thatcher made clear today that she would continue to battle moves by other European partners to push on to what most see as the next logical step -- a single European currency -- to be discussed at a special conference in Rome in December.

"This would make fundamental inroads into the very purpose of Parliament and we remain totally against a single currency," she said.