Filed at 12:08 p.m. ET

WASHINGTON (Reuters) - White House economic adviser Glenn Hubbard said on Tuesday the Sept. 11 attacks have ''significantly'' increased the likelihood that the U.S. economy, already shaky before the deadly incidents, is in a recession.

Hubbard, chairman of the Council of Economic Advisers, is the first member of Bush's economic team to openly speculate that there is a risk the world's top economy may have entered a recession, usually defined as two straight quarters of economic contraction.

However, he later said in response to questions that while the chance of two consecutive quarters of negative gross domestic product is ``high'', it is too soon to tell if the economy is in a recession.

In testimony prepared for delivery to the Senate Budget Committee, Hubbard said: ``These 'supply shock' consequences of the attacks substantially reduce the growth rate of GDP during the third and fourth quarters of 2001, and increase significantly the likelihood that the economy is in a recession.''

The attacks have hurt short-run growth prospects for the economy, Hubbard said, but steps by the Federal Reserve to cut interest rates and boost liquidity should help mitigate the effects and spur a recovery in 2002.

Fed policymakers are gathering to consider interest rate policy with a decision expected at 2:15 p.m. (1815 GMT). Economists widely expect the Fed to cut borrowing costs for a ninth time this year.

Vice President Dick Cheney speculated last month that the economy ``quite possibly'' could be in recession but Treasury Secretary Paul O'Neill has been steadfastly upbeat on the prospects for avoiding a two-quarter downturn.

On Monday, Treasury spokeswoman Michele Davis said O'Neill believed a recession could be avoided if Congress endorsed ''appropriate policy steps'' in the closing months of the year.

``The third quarter may be negative but the fourth quarter doesn't have to be if we take the appropriate policy steps,'' Davis said. O'Neill is scheduled to testify before the Senate Finance Committee on Wednesday.

The White House and congressional leaders are contemplating an economic stimulus package in the wake of the attacks. President Bush met with leaders of the House of Representatives and the Senate earlier on Tuesday to discuss a package to try to restore growth.

Bush would not say how large a stimulus package he envisioned but Fed Chairman Alan Greenspan last week suggested a $100 billion package, including $40 million in emergency spending already passed, would be large enough to have an impact without hurting long-term fiscal strength.

Hubbard urged caution in pursuing a fiscal stimulus package to get the economy rolling again. ``Proposals for action should be fiscally responsible in that they should not lead to a deterioration in the federal government's long-term budget position,'' Hubbard said.

One of the keys to the economic recovery is the confidence of businesses and consumers, which has been shaken in the wake of the attacks, he said.

``More shallow declines in confidence would permit a more rapid recovery. Larger and more sustained declines in confidence would suggest a longer downturn and slower recovery, particularly if accompanied by prolonged weakness in equity prices,'' Hubbard said.

A longer period of weak confidence could also lead to increased unemployment, he added.

The University of Michigan's consumer confidence index slumped to 81.8 from 91.5 in August. And an official with the university said on Monday that consumers suffered ``the worst bout of pessimism since 1990'' in the two weeks after the attacks.