The sharpest jump in unemployment for 16 years fuelled fears yesterday that numbers out of work are set to soar as Britain's economic downturn deepens.

The claimant count of people unemployed and receiving jobless benefits surged last month by 32,500, registering its sharpest rise since the end of the last recession in December 1992.

The drastic leap in unemployment in August, which far exceeded City predictions, took the overall rise in numbers out of work since February into six figures for the first time, at 110,000.

The jobless total was driven up to 904,000 amid predictions from economists that this will climb back above one million before Christmas as the financial turmoil gripping world markets adds to the economy's woes.

The grim picture of rapidly worsening prospects in the jobs market was emphasised as the alternative, survey-based gauge of unemployment preferred by ministers also showed a steep jump of 81,000 in the three months to the end of July. On this Labour Force Survey measure, the number of Britons out of work rose to 1.724 million - the highest level for almost a decade.

In a further ominous signal that the tide of unemployment could rise rapidly, the official survey data also revealed that numbers in work fell over the summer for the first time since the beginning of last year.

At the same time, the numbers of job vacancies available for those seeking work has also tumbled, by 13 per cent over the past six months.

With other barometers of businesses' hiring intentions showing that employers are increasingly reluctant to take on new staff, City economists sounded warnings of still larger rises in unemployment to come. “The rise in unemployment so far in the third quarter is similar to that in the third quarter of 1990, the first quarter of the last recession,” Michael Saunders, of Citigroup, said. He noted that as the recession of the early Nineties deepened, the increase in numbers out of work later burgeoned, eventually reaching a peak of 119,000 in a single month in early 1991.

Alarm over the escalating unemployment threat was stoked further when a key CBI survey revealed rapidly deteriorating conditions in manufacturing, as industry bears much of the brunt of the downturn in the domestic economy and those overseas. Confidence among manufacturers tumbled to its lowest in seven years last month as their orders fell to their worst levels in more than two years.

Anxieties over an accelerating slide into recession were heightened, too, by survey intelligence gathered by the Bank of England's regional agents.

The agents, a key influence on the Bank's decisions, reported that conditions facing consumer services businesses were at their worst for a decade, with retail trading at its weakest for three years.

The barrage of bad news and a record of the debate by the Bank's Monetary Policy Committee (MPC) at its meeting this month boosted hopes that the Bank eventually would bow to pressure to cut interest rates, although perhaps not until the spring. The MPC minutes showed the interest-rate setting committee edging towards an eventual rate cut, with Tim Besley, the committee's most hawkish member, abandoning his call for a rise in rates to help to quell inflation pressure. David Blanchflower, the MPC's arch dove, stepped up his pressure for cheaper money, voting for an immediate half-point cut.

The MPC debated the case for both a rise in rates and a cut but voted by 8-1 to keep borrowing costs unchanged. The Bank's reluctance to move too quickly to cut rates against a backdrop of intense inflationary pressures was underlined as the record showed the MPC fretting over the higher peak in inflation that is now expected and the impact of steep falls in the pound in adding to price pressures. However, the minutes showed that members also agreed that stressed financial conditions had increased the risk that the economy could slow too sharply.

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