The pound fell today to its lowest level against the euro since the single currency was introduced in 1999, as the currency markets digested comments by Alistair Darling that Britain was facing its worst economic downturn for 60 years.

Sterling also weakened ahead of this month's interest rate decision on Thursday when the Bank of England's Monetary Policy Committee (MPC) may decide to cut borrowing costs in the face of the slowdown and the latest evidence of a stalled housing market.

In the first trading session since the publication of the Chancellor's surprisingly downbeat remarks, the euro rose to 81.39p, its highest ever rate against the pound. Against the dollar, sterling fell to a two-year low of $1.80.

In an interview published on Saturday, Mr Darling told The Guardian that economic conditions were "arguably the worst they've been in 60 years". The comment was in stark contrast to Gordon Brown's insistence that the UK economy remains resilient.

Ahead of Thursday's interest rate decision, Howard Archer, chief UK and European economist at Global Insight, said it may be premature to expect the MPC to vote for a 25 basis point cut to 4.75 per cent given that inflation was still rising. However, Mr Archer expects at least one reduction to borrowing costs by the end of the year.

"The Bank of England will want to send out the message that while it recognises the increased danger of recession, it is not prepared to trim interest rates until it is confident that the combination of subdued economic activity and rising unemployment is starting to dilute underlying inflationary pressures," he said.

The sterling sell-off will add to the political embarrassment inflicted by Mr Darling, who has been accused by David Cameron, the Tory leader, of "talking the economy down". In his Guardian interview, Mr Darling also admitted that voters were "pissed off" with the Government.

But the Prime Minister brushed off speculation about Mr Darling's future. Attending the EU emergency summit on Georgia in Brussels, he told reporters: "We are getting on with the business of government."

Mr Brown emphasised that the current economic difficulties were due to the "unique circumstances" of the trebling of world oil prices combined with the international credit crunch. "We are showing that, unlike previous governments that could not manage a way through these difficulties successfully, that we are resilient in the way that we deal with these problems," he said. "I think that you will find that the actions that we have taken and the actions that we are taking are actions that are designed to help the British people get through what is a difficult world economic downturn."

Mr Brown’s spokesman insisted the Prime Minister has "full confidence" in his Chancellor and was working closely with him on a package of measures designed to help those hit by rising prices and the sluggish housing market.

Tomorrow, the Prime Minister will join Hazel Blears, the Communities Secretary, in unveiling new help for first-time home-buyers and people facing the risk of repossession. Further announcements are expected shortly to ease the pressure of high fuel prices as part of a political relaunch before the party conference season later this month.

Meanwhile, the Schools Secretary Ed Balls brushed off suggestions that he was angling for Mr Darling’s job.

Launching a new curriculum for under-fives, Mr Balls, who is Mr Brown's closest political aide and ally, said: "I think we’ve got a really good Chancellor in Alistair Darling and I can’t think of any more important job I could have than making sure that the children in our country are equipped to learn."

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