By Mark Felsenthal

WASHINGTON (Reuters) - The Federal Reserve held U.S. interest rates steady on Tuesday, expressing concerns about both economic growth and inflation and indicating it is in no rush to push borrowing costs higher.

The 10-1 decision by the U.S. central bank leaves the benchmark federal funds target at a low 2 percent, where it has been since April.

The Fed had reduced rates by a cumulative 3.25 percentage points since mid-September in response to a sharp housing retrenchment and turmoil in credit markets, and financial markets had widely expected no change on Tuesday.

"Although downside risks to growth remain, the upside risks to inflation are also of significant concern," the Fed said in a statement outlining its decision, noting that the measures it has already taken should promote economic growth.

The announcement closely mirrored a statement issued after the Fed's last meeting in late June. However, it omitted a phrase from the June statement that had said risks to growth appeared "to have diminished somewhat."

And while the Fed made clear its anxiety about inflation, it dropped language from June saying those risks "have increased" -- a quiet nod to the sharp decline in oil prices in recent weeks.

U.S. stock investors latched onto signals that the Fed likely would not raise interest rates in the near term, and the market sharply extended earlier gains. The blue-chip Dow Jones industrial average ended up 331 points, or 2.9 percent. U.S. Treasury debt prices and the dollar slipped, while interest rate futures pared the implied prospects of rate hikes later this year.

A Reuters poll of 17 primary dealers who trade directly with the Fed found that all believe the U.S. central bank is on hold for its next two meetings as worries about the economy trump fears about rising inflation.