WASHINGTON  The Federal Reserve lowered its benchmark interest rate by half a percentage point on Wednesday, its second big rate cut this month, as policy makers tried to fend off what could be the worst economic downturn in decades.

The move brought the target rate for federal funds  the interest rate at which banks lend to each other overnight  to 1 percent, down to the near-record lows reached in 2003 and 2004, when the Fed was trying to encourage an economic recovery after the bursting of the Internet bubble. The central bank left open the possibility of going still lower, warning “downside risks to growth remain.”

As the crisis that began in the mortgage market spreads through the economy, policy makers are redoubling their efforts to contain the damage. Even as the Fed reduced rates on Wednesday, the Bush administration was weighing a plan to slow the foreclosure epidemic in the nation’s housing market. Details of the initiative were in flux, but the plan could involve the government guaranteeing the mortgages of as many as three million at-risk homeowners, a step that could cost taxpayers tens of billions of dollars, people briefed on the plan said.

But neither the Fed’s move nor word of the possible mortgage rescue were enough to allay concern in the financial markets that the economy was in deep trouble. The stock market, which had rallied briefly after the rate cut was announced shortly after 2 p.m., tumbled in the final minutes of trading.