UK unemployment has surged at the fastest pace in 17 years by 164,000 to 1.79 million and could rise even further to two million by the end of the year.

The rise in unemployment during the three months to August marks the biggest increase since 1991 while the number of people claiming jobless benefits rose by 31,800 over in September.

David Blanchflower, a member of the Bank of England's rate-setting committee has predicted the ILO measure of unemployment could hit two million by the end of the year.

The total number of people in employment slumped by 122,000 in the three weeks to August, the largest drop since early 1993.

Prime Minister Gordon Brown refused to comment on today's figures, which one economist described as "grim", but said he would do everything possible to keep people in jobs.

“We will do everything we can to help create jobs and help people maintain jobs in the British economy," said Mr Brown.

Alan Clarke at BNP Paribas, said: "Employment is falling off a cliff and it is still early days in this slowdown."

Brendan Barber, TUC general secretary, said: “This is extremely bad news, and these figures do not even show the effects of the bank crash. After years when we could take reasonably full employment for granted, we are now in for grim times. This is the next big challenge for Government.”

The dismal figures came as it emerged that nearly thousands of public sector workers will lose their jobs over the next two years.

The Bank of England will now come under increasing pressure to make another significant cut in interest rates after last week's emergency half point cut to 4.5 per cent.

Some experts say that the Bank could cut rates to as low as 2 per cent in an effort to shore up the flagging economy.

Howard Archer, chief UK and European economist at Global Insight, said: "We expect interest rates to be cut by at least another 50 basis points before the end of the year, very possibly as part of further coordinated central bank action."

Some 9,891 jobs in the prison, probation and court services will be cut as the Ministry of Justice seeks to save £900 million, The Times revealed this morning.

There are also fears that job losses in the financial sector could surge as Lloyds TSB takes over HBOS, the biggest mortgage lender in the UK. Analysts say it is likely that thousands of bank workers and call centre staff will lose their jobs as the combined group slims down its workforce.

Workers are already under increased pressure as the cost of living has soared over the last year. Inflation rose to a 16-year high of 5.2 per cent last month, and although inflation is forecast to start falling soon, the increased cost of food, energy and homeloans could plunge those who lose their jobs into financial hardship.

This, in turn, could heighten the risks of families losing their homes. Bob Pannell, of the Council of Mortgage Lenders, said yesterday that repossessions could rise further next year as unemployment increases. Repossessions are set to rise by 50 per cent to 45,000 this year.

Business groups have been warning that unemployment is set to rise as the country teeters on the edge of recession. The CBI forecasts that unemployment will rise by 330,000 to 2.12 million by the end of next year, while the British Chambers of Commerce said that the number of people out of work could rise by 350,000 over the next 12 months.

The TUC gave a gloomier forecast, predicting that the number of people out of work for a year or more could rise by 700,000.

But Vicky Redwood, of Capital Economics, said that unemployment could rise to 3 million by the end of the 2010, leveis not seen since the last recesssion in the early 1990s. "With the UK heading into recession, we expect this measure to rise by a total of 1.5 million to around 3 million by the end of 2010," she said.

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