TOKYO, Oct 7, 2008 (AFP) - Japan's central bank said Tuesday that it was holding its key interest rate steady at 0.5 percent, as fresh turmoil erupted on global financial markets.

The policy board made the decision unanimously at the end of a two-day meeting, the Bank of Japan (BoJ) said in a statement.

The markets had not expected any change in the interest rate, which is the lowest among major economies and has been held steady since February 2007.

But there is growing speculation that the world's top central banks may step up joint efforts to try to contain the mayhem on global financial markets.

Investors in particular are looking for any hints of possible coordinated interest rate cuts to try to shore up markets and the economy. Finance chiefs from the Group of Seven rich nations are set to meet Friday in Washington.

The BoJ's decision to stand pat came amid renewed chaos on financial markets. The Nikkei index tumbled more than five percent at one point Tuesday, dropping below 10,000 points for the first time in more than four years.

The bank said Japanese economic growth had stalled due to the high costs of energy and raw materials and slowing exports.

'At the moment, as the slowdown in overseas economies is becoming clearer, there is a high possibility that this situation will continue.'

'Due to the collapse of US and European financial institutions, tensions in international financial markets are increasing' and there is a risk the global economy may worsen, the bank said.

'We must be vigilant to the risks of deteriorating economic conditions,' it said, adding that it would monitor the situation.

Japan's economy suffered its worst contraction in seven years in the second quarter of this year, teetering on the verge of recession.

Prime Minister Taro Aso said Tuesday that Asia's largest economy was solid but the global financial crisis could sap demand for Japanese exports.

'The financial system in Japan itself is sound,' Aso told a parliamentary committee.

But the global crisis 'will surely affect the real Japanese economy,' Aso said. 'We must carefully monitor the situation and take appropriate action when needed.'

Earlier in the day the bank injected emergency funds into the short-term money market for a 15th straight day, adding 1.0 trillion yen (9.8 billion dollars) to try to prevent a domestic credit crunch.

BoJ governor Masaaki Shirakawa was due to hold a news conference later in the day.