All members of the U.S. Federal Reserve's policy-setting committee agreed a half-percentage point federal funds interest rate cut was necessary to shield the economy from credit disruptions and an intensifying housing slowdown, minutes of their September 18 meeting released on Tuesday showed.

"In order to help forestall some of the adverse effects on the economy that might otherwise arise, all members agreed that a rate cut of 50 basis points at this meeting was the most prudent course of action," the minutes said.

Members thought sharply lowering benchmark overnight borrowing costs could help offset the effect of tighter financial economic conditions on the economy.

Without such a move, policy-makers were afraid that tightening credit conditions and the deepening housing slump that had been triggered by a spike in mortgage foreclosures would lead to "significant weakness" in business activity and hiring.

Also, the damage to financial markets as credit dried up could get worse and further chill economic activity, members of the U.S. central bank's interest-rate setting Federal Open Market Committee thought.

At that meeting, the Fed slashed its target for benchmark overnight borrowing costs to 4.75 percent, surprising many in financial markets who had been expecting a quarter-percentage point rate cut to 5 percent.

The minutes show that at the time, Fed policy-makers saw the economic situation fraught with a high degree of uncertainty as they considered whether the credit crunch would substantially slow economic growth or not.

They believed risks were tilted toward a slowdown in economic activity, but also noted that the economy had previously weathered periods of financial disruption with only limited broadly adverse effects.

At the same time, the Fed believed that tighter credit would restrain economic growth in the period ahead, and worried that any further disruptions in financial markets could magnify risks to the economy.

The Fed discussed "additional policy options" to address strains in money markets at the meeting, but no decisions were taken at the time, the minutes said.

(Reporting by Mark Felsenthal)