The pound plunged to a five-year low against the dollar and London shares plummeted by another 4.5 per cent yesterday, as markets sounded a harsh vote of no confidence in Britain's rapidly worsening economic prospects.

The battering of shares and sterling came as fears over a long and painful economic downturn were fuelled by the first admissions from Gordon Brown and Mervyn King, the Governor of the Bank of England, that Britain was entering a recession.

Official GDP figures tomorrow are expected to confirm that the economy shrank in the past quarter, registering its first contraction since the end of the last recession in the early Nineties.

Mounting market gloom over the likely scale of the recession helped to drive the pound to some of its steepest losses against the dollar since 1992, when Britain was ejected from the European exchange-rate mechanism (ERM) on Black Wednesday.

Sterling ended a day of sustained assault on the foreign exchanges down more than 6 cents, or 3.6 per cent, from Tuesday's close, at $1.6334, having earlier plumbed five-year lows under $1.62. The pound's dollar value had already dropped more than 5 per cent this week and it is now on course to register its steepest one-week percentage decline against the greenback since the end of 1992.

Its dollar losses also drove its overall value on the trade-weighted index, against a basket of rival currencies, to 88.6, close to 12-year lows hit last month. Sterling's losses against the dollar were fuelled by a resurgence in the US currency, which also leapt to two-year highs against the euro as a flight by edgy investors out of holdings in economically vulnerable emerging market countries triggered a flood of capital back into America.

However, deep-seated market pessimism over Britain's own fortunes was emphasised by the latest slump in the FTSE 100, which tumbled by 188.8 points, or 4.5 per cent, to close at 4,040.9 in its latest bout of brutal losses.

Hopes that the Bank of England would act soon to shore up fast-faltering UK growth with steep cuts in interest rates were boosted by the record of this month's meeting of its Monetary Policy Committee, which ordered an emergency half-point cut in interest rates.

All nine MPC members backed the Bank's move to join with the US Federal Reserve and European Central Bank in the co-ordinated emergency move. Expectations that more rate cuts would follow swiftly were reinforced as the minutes showed MPC members agreeing that the outlook for the economy had “deteriorated substantially”.

The committee also agreed that dangers from inflation had “shifted decisively”, with a growing risk that the downturn could eventually drive inflation below the 2 per cent target.

Markets were further unsettled, however, as neither the minutes, nor Mr King in a speech on Tuesday night, signalled how far interest rates might fall. “In the current financial market turbulence, the reduction in Bank rate that would ultimately be required to meet the inflation target was very difficult to gauge,” the minutes said.

Anxieties over economic prospects were stoked further by the Bank's latest intelligence on conditions from its network of regional agents, which was almost entirely bleak. The agents' reports pointed to retail sales and consumer spending at their weakest for a decade; business services at its weakest since 2001; the construction industry in its direst state since 1997; manufacturing output at its lowest since 2002; and businesses cutting jobs and investment sharply as their profitability wilted in the face of the downturn.

Michael Saunders, the chief UK economist for Citigroup, noted that the agents' reports covered only last month, and that conditions during this month were likely to have been even worse.

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