Ben Bernanke, Chairman of the Federal Reserve, has paved the way for an imminent cut in US interest rates and sounded a warning that world financial turmoil will inflict a deeper and longer downturn on America.

Mr Bernanke’s boost to hopes for a Fed rate cut to attempt to head off a painful US and world recession came as he acknowledged the threat from a financial crisis of “historic dimension”.

He said: “The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance and further increase the risks to growth. The Federal Reserve will need to consider whether the current stance of policy [interest rates] remains appropriate.”

The Fed’s shift to signal a cut in rates, perhaps of a half-point, on or before its next meeting at the end of this month, came as it again increased efforts to shore-up the US economy. In a radical step, it is to buy commercial paper from the paralysed corporate loan markets that are vital to the survival of America’s businesses.

It was not, however, enough to prevent US stocks plunging, with the Dow plummeting 5 per cent.

In Britain, hopes were rising that the Bank of England will tomorrow lead the way for a future Fed rate move with a cut in UK rates, possibly by an aggressive half-point.

Fears of a UK recession rose as official figures showed that production at Britain’s factories tumbled by 0.4 per cent last month. This marked a sixth consecutive monthly fall and manufacturing industry’s worst run since the early Eighties.

Pressure on the Bank of England to act was stoked by the National Institute of Economic and Social Research. The institute estimates that Britain’s economy has shrunk by 0.2 per cent in past three months, suggesting that it is probably already in recession. Official GDP figures for the quarter are released next month.

Money market stresses rose again, too, as the cost of three-month euro borrowing between banks reached a record 5.37 per cent. Interbank rates for overnight dollar lending leapt by 1.5 points to 3.9 per cent, while overnight sterling rates jumped by 0.76 points to 5.8 per cent.

As the Chancellor prepared to unveil an injection of up to £50 billion in new capital for British banks, the International Monetary Fund estimated that should Britain also need to mimic the $700 billion (£400 billion) US bail-out plan to buy up past toxic loans from banks, the cost of this could add £110 billion to the rescue bill. Such a move could prove essential to stopping the credit crunch making new loans almost impossible to obtain, and tipping the economy into recession.

The IMF urged decisive and aggressive action from Western economies to stop the escalating financial crisis causing a severe global downturn.

In its Global Financial Stability Report, it issued a warning over the risks that world financial upheavals create a vicious downward spiral, leading to recessions that in turn feed still more market turmoil. “The risk of a more severe adverse feedback loop between the financial system and the broader economy represents a critical threat,” it said. Urging comprehensive steps to halt what it called a destructive process, the fund said actions by governments, central banks and regulators must be early and decisive.

The IMF’s call came as estimates of losses inflicted on US and global banks by the crisis could rise to $1.4 trillion against an April estimate of $1 trillion, and the $760 billion written off by banks up to the end of September.

It found: “The scale of the current credit crisis is likely to be higher in dollar terms compared with financial crises over the past two decades.” The Fund estimated that the vast cost, and more write-offs, meant that banks will need to raise at least another $675 billion of capital over the next few years on top of $430 billion already secured.

With banks struggling to raise private funding, the IMF said that governments were likely to have to step in with big injections of taxpayers’ cash.

The global disappearance of trust, and widespread cash hoarding, have made it inevitable that the authorities will need to play a major role, it said.

The IMF gave a strong warning that a global strategy is needed rather than piecemeal national measures. “Without such coordination, the adjustment process is likely to be more painful and protracted,” it said.

It cautioned that the losses inflicted on banks are set to continue to multiply, inflicting enormous strains. The value and number of US loans turning sour is set to burgeon as America’s housing slump persists and the US economy slides towards recession, it said.

In Britain, the IMF said that the heavy debt burden piled up by households spelt similar problems to those of America as the UK housing market plummets, inflicting losses on lenders as many home loans go bad.

“With house prices falling rapidly, arrears and losses are likely to rise several times over,” it said. However, it added a reassurance that the scale of defaults was “unlikely to breach their historical peak reached in the early 1990s, with mortgage loss rates likely to be considerably lower than those observed in the United States”.

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