Sterling plunges as King admits Britain on brink of recession

The pound fell to a five-year low against the dollar this morning after the Bank of England governor Mervyn King admitted for the first time that the UK is heading into a recession.

Britain faces a "long, slow haul" to reboot the economy, Bank of England governor Mervyn King has warned. He is the most senior financial figure to admit that the UK is entering a technical recession.

In a frank speech to a business audience in Leeds last night, King predicted that house prices will fall further and that economic hardship is likely to last for several years.

The pound began tumbling last night in response to King's speech, as traders in the US and Japan began dumping sterling last night in a rush to cut their losses. The pound slumped more than six cents against the dollar to $1.621 - the biggest one-day drop since "Black Wednesday" in September 1992.

Meanwhile shares also fell sharply in London this morning, with the FTSE 100 shedding over 100 points, or 2.3 per cent, in early trading to 4127.29.

The Bank of England governor said that the recent financial turmoil had seen the banking system come closer to collapse than at any time since the beginning of the First World War. "Following the failure of Lehman Brothers on September 15, an extraordinary, almost unimaginable sequence of events began which culminated a week or so ago in the announcements around the world of a recapitalisation of the banking system."

However he said that he was confident that the unprecedented steps taken by governments around the world to pour £2 trillion into the ailing financial sectors would be a turning point for the crisis.

"We are far from the end of the road back to stability, but the plan to recapitalise our banking system, both here and abroad, will come to be seen as the moment... when we turned the corner."