THE baht broke below the 40-to-the-dollar level yesterday and Thai stocks soared 8.17 per cent in response to US signals that it would cut interest rates for the first time in almost three years.

But analysts cautioned that hopes of a Thai recovery on the back of the US interest rate cuts are likely to be premature since the local economy, which is expected to contract by 7-8 per cent this year, will need a rigorous stimulus package to prevent it from sliding deeper into recession.

''I don't think the US rate cut will help the Thai economy that much since we've got problems of our own, although it might help to reduce interest rate differentials,'' said a former governor of the Bank of Thailand.

''What we need now is a stimulus plan, which must be implemented with a boost in exports. Export earnings will help expand the monetary base, and thus would genuinely improve liquidity in the financial system,'' he added.

In testimony before the Senate Budget Committee on Wednesday, Alan Greenspan, the US Federal Reserve Board chairman, hinted at a possible rate cut when the Fed policy-makers meet next Tuesday, saying that world leaders needed to be sensitive to deepening signs of global distress.

He was quoted as saying that the central bank was ready to act to prevent the widening global turmoil ''from really spilling over and creating some very significant difficulties for all of us''.

The baht strengthened significantly yesterday gaining 1.88 per cent to trade between Bt39.71 and Bt39.77 to the US dollar, against Wednesday's Bt40.47, before closing at Bt39.80. The downward trend in interest rates also helped boost equity prices, particularly energy and telecom stocks, in a market that has been traditionally liquidity-driven.

Thai interest rates have been falling sharply over the past month, with ample liquidity but without much actual lending due to concerns over the growing non-performing loans in the system. Bangkok Bank yesterday announced it would cut its prime rate by 0.25 of a percentage point to 14.50-15.25 per cent, effective next week.

Andy Xie and Stephen Jen of Morgan Stanley Asia said the impact of the US interest rate cuts on Asia, excluding Japan, would be limited as it would not automatically lead to the flow of liquidity back into the region.

They said that normally, liquidity created in the G-7 countries can be channelled through to Asia through interbank lending, direct lending to Asian corporates or outright takeovers and government lending. But banks in Asia are in a shambles with rising non-performing loans, which has created overhanging debt and a severe liquidity trap, they said.

Companies aren't likely to get fresh liquidity from the US or other G-7 countries because they ''are already highly geared and facing declining profits or losses'', they said.

Government borrowings are more viable given that premium risks of the emerging markets are so high that lower interest rates in the US or other G-7 countries might have limited benefits, they said.

One bright spot in the hopes for US rate cuts lies in exports for Thailand and other Asian countries. ''Rate cuts by G-7 governments could, by boosting asset prices and reducing savings, increase demand substantially for Asian goods in Europe and the United States,'' Xie and Jen said.

Dr Jim Walker of Credit Lyonnais Asia Ltd was quoted by Dow Jones as saying that Thailand and South Korea are nearly bottoming out, believing they will be the first countries to experience a recovery.

Interest rates are also in focus, said Walker, noting that when rates edge lower without compromising the exchange rate, that will be a sign that capital flight has abated.

''We're seeing signs of that in Korea and Thailand,'' he said.

He said an expected cut in US interest rates could further stabilise some countries by ''mitigating the downturn forces'' but wouldn't correct underlying problems.