The pound is on the verge of parity with the euro as concerns grow over the state of the British economy.

With sterling slumping yesterday to its lowest level yet, £1 was buying just €1.03 at a bureau de change near the Eurostar terminus in London – meaning that an €80 meal for two in Paris now costs more than £77, compared with less than £59 a year ago.

Ministers were piling pressure on the banks to increase lending before a meeting with the banking industry today. Alistair Darling, the Chancellor, held out the prospect of wider taxpayer guarantees beyond the £100 billion already subscribed, but only if there were an absolute assurance that more loans would be made available to families and businesses.

He was speaking after an angry Commons clash between Gordon Brown and David Cameron, who said that the continuing lending drought showed that the Government’s bank recapitalisation plan was not working.

Mr Cameron urged the Government to adopt Conservative plans for a national loan guarantee scheme and later published a draft Bill to implement the plan. It would provide £50 billion of guarantees for new lending to businesses of all sizes.

Mr Darling said that he had always intended to keep the October bank bailout programme under review. He said: “The banks have to understand that we have put substantial sums of public money in to support them. They, in turn, need to play their part.”

Earlier this week there were warnings that the economy would shrink by 1 per cent this winter. Sterling fell to just €1.1397 on foreign exchange markets at one point yesterday and closed at €1.1411 – dramatically down from its peak of more than €1.40 set only a year ago. A euro cost 87.74p.

The economic situation has become so serious that last night the Treasury was not able to rule out the prospect of extraordinary measures being taken to pump billions of pounds into the economy. The Bank of England was reported to be looking at a crisis strategy known as “quantitative easing”. This would involve the Bank buying up either government or commercial debt using bonds and securities. It is the direct modern-day equivalent of printing money.

The Chancellor said that such measures would be considered only if further cuts took the base rate close to zero –the point at which the Bank of England would run out of “firepower”.

Treasury sources said that while it was prudent for the Bank to consider all options the chances of quantitative easing being used remained slight.

Peer Steinbrück, the German Finance Minister, described Britain’s switch from financial prudence to heavy borrowing as crass and breath-taking. In an interview withNewsweek magazine, he criticised the decision to cut VAT. “All this will do is raise Britain’s debt to a level that will take a whole generation to work off,” he said.

British officials said that the intervention was a reflection of struggles within German politics.

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