The Reserve Bank cut its key cash rate by a full percentage point to 6pc, double the 50 basis-point cut expected by markets.

The move follows a 25 basis-point cut by the RBA in September, lowering the lending rate from a 12-year high.

"Overall, my guess remains that the RBA's cash rate is on the way from 7pc to 6pc to 5pc and towards 4pc," said Rory Robertson, Macquarie interest-rate strategist, before the RBA announcement.

"The RBA seems likely to cut its cash rate all the way back to 4.25pc within two years."

One reason for the steep cuts to come is that clogged credit markets overseas mean that only some of the RBA's rate reductions are likely to be passed on by commercial banks, Mr Robertson said.

Commercial banks announced cuts to their variable home loan rates within minutes of last month's RBA rate move, but the signals this month have suggested consumers and business borrowers are likely to receive only part of today's rate and possibly not for some days.

Prime Minister Kevin Rudd and Treasurer Wayne Swan have both sought to head off some of the criticism of the banks from any delayed rate cuts on their part, saying it is important the country's banks remain as strong as possible during a period of extreme market turmoil that has already claimed some of the largest US and European banks.

Opposition Leader Malcolm Turnbull, however, says that the banks remain highly profitable in a market of shrinking competition and can afford to follow the RBA's rate cuts.

Just prior to today's RBA decision, the benchmark S&P/ASX200 share index was down about 0.5pc at 4519 points, clawing back a drop of as much as 3.3pc earlier in the day.

Overnight, European and US markets plunged on worries that the global economy with wither.

The Australian dollar, which has plunged more than 10 US cents in the past couple of trading days, was recently at US71.97c.