Sterling hit a five-year low against the dollar on Wednesday after Mervyn King, governor of the Bank of England, said Britain was headed for a prolonged slowdown.

Mr King on Tuesday night gave his gloomiest assessment of Britain's economic prospects since becoming Bank governor in 2003, saying that the country was now "entering a recession".

He compared the recent capital flight from British banks with a "mild form" of a 1990s-style emerging market crisis, warning about the risk of another sharp decline in sterling and an even deeper recession.

In one of only three big speeches Mr King gives a year, his views are bound to be taken by markets as a clear sign the Bank is gearing up for further significant cuts in UK interest rates.

Sterling tumbled across the board on Wednesday, falling 5 cents against the dollar to a five-year low of $1.6203. Sterling fell 2.5 per cent against the yen to Y128.18, and slipped 0.6 per cent against the euro to £0.7874.

Minutes from the Bank of England's rate setting committee released on Wednesday showed the MPC voted unanimously to cut rates by 50 basis points to 4.5 percent this month, joining banks around the world in an emergency rate cutting.

The Bank's quarterly forecasting round is already under way and Mr King's gloom, punctuated only by relief at the fall in oil prices, will reflect the UK central bank's new thinking about the economy.

Until Tuesday night, Mr King and the Bank had refused to utter the word "recession", insisting that the term should only be used to signify a deep contraction in output and not two successive quarters in which the economy might shrink a little.

On Tuesday night he had no such qualms, saying a recession was likely because the recent financial crisis had come on top of the rise in oil prices, which had already squeezed incomes.

"If the news on the domestic front were not sufficiently discouraging, the rest of the world economy also appears to be slowing rapidly," he added.

Mr King's speech came as the National Institute of Economic and Social Research, one of the leading academic think-tanks in Britain, forecast that it was odds-on that the economy would contract for four successive quarters starting with the third quarter of this year.

The CBI employers' organisation also released a survey showing industrial orders falling to their lowest level since October 2003 and business confidence plummeting to its lowest level since the industrial shake-out of the early 1980s.

Mr King supported the recapitalisation of banks, which he said should foster "a long, slow haul to restore lending to the real economy, and hence growth of our economy, to more normal conditions". But he held out little hope for companies that have interest rates tied to bank borrowing costs, as measured by the Libor interbank interest rate.

"The age of innocence - when banks lent to each other unsecured for three months or longer at only a small premium to expected policy rates - will not quickly, if ever, return," he said.

Mr King's sombre mood was sealed by a comparison of the decline in capital inflows to British banks this year with emerging economies, such as Mexico, South Korea, Indonesia and Thailand, in the 1990s.

"Unless [the inflows] are replaced by other forms of external finance, the adjustments in the trade deficit and exchange rate will need to be larger and faster than would otherwise have occurred, implying a larger rise in domestic saving and weaker domestic spending in the short run," he said.

Later on Wednesday, the minutes from the Bank's most recent monetary policy committee meeting are expected to show that the worsening economic climate prompted the unanimous decision to cut rates to 4.5 per cent from 5 per cent.

"We look for further aggressive policy easing," said James Knightley at ING. He added: "It seems likely that the Band will have to work hard to get market interest rates lower with the policy rate likely to break below 3 per cent in early 2009."