LONDON - THE British economy is teetering on the brink of recession, official data showed on Friday revealing it shrank 0.5 per cent in the three months to September in the first contraction since 1992.

In reaction, the pound fell to a five-year low of US$1.55 (S$2.34) - the lowest point since Apr 2003 - as dealers bet on more interest rate cuts to boost the flagging economy.

The London stock market plunged by almost seven per cent, with the FTSE 100 index hitting a five-year low of 3,814.35 points on mounting fears about an impending recession amid the burgeoning global financial crisis.

Gross domestic product (GDP) grew by just 0.3 per cent during the third quarter compared with the Jul-Sept period in 2007, the Office for National Statistics added in a statement on Friday.

Friday's data was worse than market expectations for a quarterly contraction of 0.2 per cent and annual expansion of 0.5 per cent.

Capital Economics analyst Vicky Redwood described the data as 'truly shocking.'

She said, 'The fact that a recession is already under way isn't a surprise - even Mervyn King and Gordon Brown referred to it earlier this week.'

She added, 'But the fact that output has shrunk so much so early on in the downturn is clearly worrying.

'We expect the economy to contract for around two years in all.'

Prime Minister Gordon Brown told lawmakers this week that the global economic downturn was 'likely' to spark a recession.

'Having taken action on the banking system, we must now take action on the global financial recession, which is likely to cause recession in... Britain, too,' Mr Brown had said on Wednesday.

He added that the financial crisis could also lead to recession in the US, France, Italy, Germany and Japan.

Bank of England governor Mervyn King also said that Britain was 'likely' entering recession, with the credit crunch and high inflation combining to pose 'the risk of a sharp and prolonged slowdown in domestic demand.'

British finance minister Alistair Darling has meanwhile vowed to boost public spending to help pull the economy through a looming recession.

The Organisation for Economic Cooperation and Development (OECD) has forecast that Britain faces a recession in 2008.

The OECD, the Paris-based grouping of 30 developed countries, predicts that the economy will fall into recession in the second half, contracting by 0.3 per cent in the third quarter and 0.4 per cent in the fourth.

Earlier this month, the BoE unexpectedly cut British interest rates by a half-point to 4.50 per cent in a coordinated international rate-cutting drive amid markets chaos stemming from the global financial crisis. -- AFP