GORDON BROWN won extra ammunition in his campaign to reject the single currency as fears of a new recession forced the European Central Bank (ECB) to cut rates to the lowest level since the Second World War.

The ECB lopped a half-point off borrowing costs to just 2 per cent in an aggressive attempt to kick-start the eurozone’s floundering economy.

In contrast, the Bank of England’s Monetary Policy Committee (MPC) disappointed business groups as it put interest rates on hold after a spate of more positive signals from the British economy.

The ECB moved as official figures confirmed that growth in the eurozone ground to a halt in the first quarter and that the economy could face months of stagnation.

The evidence strengthens the Chancellor’s hand as he puts the finishing touches to a statement due on Monday, when he is expected to rule out membership of the euro.

As Mr Brown insisted again yesterday that the single currency decision would be taken on economic grounds, the eurozone’s data showed that only moderate growth in France and Spain prevented the eurozone economy from shrinking in the first quarter.

Germany’s economy shrank by 0.2 per cent after zero growth in the final quarter of last year. In Italy, the first quarter also saw the economy contract, while the Netherlands sank into recession.

The French and Italian Prime Ministers were among a number of politicians to cheer the ECB’s decision, but many economists gave warning that the move was too little, too late.

Philip Shaw, of Investec, said: “To our minds the economy had been crying out for the further stimulus for some months.”

Wim Duisenberg, the ECB President, cited weakening inflation as the main reason for the cut, adding that rates were now “historically low”. Hinting at further moves, he said: “If the US Federal Reserve could contemplate further cuts, then you can imagine we have not exhausted our room for manoeuvre.”

But analysts expressed incredulity when Mr Duisenberg dismissed the risk of deflation in Germany, arguing that this was “not a meaningful concept applied to individual regions”.

The ECB President also called for Britain to ditch the pound for the euro. He said such a move would be “advantageous for the development of the United Kingdom”.

While he admitted that the eurozone economy had performed poorly compared with the UK, he said the blame for this lay with the shock from German re-unification a decade ago.

Despite the ECB’s rate cut, the euro surged upwards by 2 per cent against the dollar, adding to the pressure on eurozone business, as markets focused on expectations of more cuts in US rates following weak American jobs data.

The euro climbed as high as $1.1870, just below recent record highs above $1.19. The dollar’s losses also pushed the pound to three and a half-year highs above $1.66.