The economy shrank more than expected and for the first time in 16 years in the third quarter of 2008, official data showed on Friday.

Output fell by 0.5%, according to the Office for National Statistics, a bigger-than-expected drop, knocking UK shares and weakening the pound.

The figures are likely to boost expectations that the Bank of England will cut interest rates by another 50 basis points next month as the economy looks like heading into its first recession since the early 1990s. So the UK will be classed as being in recession if the economy slows in the fourth quarter as well. 

The Chancellor voiced confidence the UK would "get through" the slowdown. "It will be a difficult period, but I am absolutely confident we will get through it, " Alistair Darling said in an interview with the BBC.

"The risks are that this is going to be a pretty severe recession so the thinking is that at least 50 basis points (cut) at the next (MPC) meeting, unless the meeting is brought forward. We are looking for rates at 3 percent by the middle of next year. The risk is it could be lower than that. 

Blame is on the fall in UK output on the credit crunch, falling house prices and rising energy prices, which have forced consumers to tighten their belts.

Charlie Bean, deputy governor of the Bank of England's rate-setting committee, the MPC, described it as a "once in a lifetime crisis and possibly the largest financial crisis of its kind in human history".

UK shares tumbled further on the news, down 7% in early afternoon trade.

The pound was also affected, falling to $1.5889 - the first time it has fallen below $1.60 in the past five years.

With the 0.5% fall in economic output is far greater than predicted and increases expectations of further interest rate cuts from the current level of 4.5% to ignite growth.

t is the biggest drop in UK gross domestic product (GDP) since the first quarter of 1990. 

GDP was 0.3% higher compared with the same period last year, the weakest rate of growth since the second quarter of 1992. The services sector - which represents three quarters of the UK economy - fell 0.4%, the biggest drop in 18 years. Within the services sector, hotels and restaurants saw the biggest fall, down 1.7%, compared with an increase of 0.2% in the previous quarter.

The biggest surprise relative to consensus was the service sector, where there was a fall of 0.4 percent quarter-on-quarter. This was driven by a particularly sharp drop in consumer-related sectors (distribution, hotels and catering fell by 1.7 percent quarter-on-quarter), confirming that this will be a very much a consumer-led recession. Manufacturing output fell 1% while construction tumbled 0.8% compared to the previous quarter.

Analysts expressed their shock at the news and their desire for aggressive rate cuts.

Business group CBI said the figures were worse than expected and called for a 0.5 percentage cut in rates at the next meeting of the MPC.

This is basically the return to 1990s with the figures raise fears we could be in for a recession very like the one in the early 1990s when unemployment hit three million.

He says it is unlikely to be just a technical recession (two consecutive quarters of negative growth), but could be a year or so of negative growth.

But the difference is now that interest rates are much lower and likely to go lower, Deputy bank governor Charlie Bean told the Scarborough Evening News that the bank's independence - and ability to set monetary policy - meant that the UK was in a better position than in the early 1990s.