The pound plunged to a record low of 87.5 pence against the Euro following a think-tank report painting a gloomy picture of Britain in recession.

The National Institute of Economic and Social Research said the economy shrank by 1% in the three months to November - and contraction is speeding up.

The think-tank’s figures show the economy shrank by 0.8% in the quarter ending October 31.

The October industrial production figure - the eighth monthly fall in row marking the longest run of falling output since 1980 - dragged annual output down by 5.2%, the sharpest year-on-year decline since 1991 when the UK was last in recession.

The report followed desperate figures from manufacturing, housing and retail sales on Tuesday, that boosted expectations that a steep recession will put more pressure on the Bank of England to slash interest rates to record levels.

NIESR said that the outlook for 2009 was grim: "The Government faces the real risk that, despite the measures it took in last month's Budget, output will fall more sharply than it expected to the end of next year. The main problem that it needs to address very urgently is the availability of bank credit; further interest reductions are unlikely to have much effect."

"There is every reason to believe that the output decline in the fourth calendar quarter of the year will be larger than 1% in magnitude."

Despite the pound's losses against the euro, it edged up 0.2 percent to $1.4767 against the US dollar as word hit Wall Street of moves to inject cash to bail out US carmakers.

"These readings made a strong case for the United Kingdom ultimately suffering the worst recession in the developed world," Commerzbank analysts said in a research note.

Despite the gloom, the FTSE closed up 81 points at 4381 after opening at 4300 but the DOW fell from 8934 to 8691.