The pound dropped to a fresh record low against the euro on Thursday, breaking through the 95p for the first time, as the prospect of further interest rate cuts from the Bank of England continued to punish the currency.

The pound was also undermined as a government report showed the UK's budget deficit widened to a record level in November as tax revenue declined in the face of the worsening recession and takes the losses for the week against the euro to more than 6 per cent.

Sterling's fall followed comments from Charlie Bean, the Bank's deputy governor, who said in an interview with the Financial Times that that zero interest rates were a possibility in the UK and that the government was likely to pump billions more pounds into the banking system as the economy kept slowing.

This raised the the prospect that not only was the Bank likely to make a further aggressive cut to UK interest rates - which currently stand at 2 per cent - at its next meeting in January, but that it might follow the US and adopt a quantitative easing approach to monetary policy.

This means once UK rates fall close to zero, the UK authority's only option to provide a monetary stimulus is to pump money into the financial system.

Neil Mellor at Bank of New York Mellon said talk of UK quantitative easing was now becoming "mainstream", and that the Bank of England had only refrained from a larger interest rate cut at its December meeting for fear of destabilising financial markets.

The Bank's stance stands in contrast to recent comments from European Central Bank officials, such as Germany's Jürgen Stark, who has indicated that eurozone interest rates will only come down in small steps.

European officials have also become increasingly critical of lax fiscal policy with Jean-Claude Trichet, ECB president, recently warning of the importance that the EU's budget rules were respected.

"It requires little imagination to conclude that in the face of simmering concern about the level of policy stimulus in the eurozone, the downside risk to UK interest rates clearly exceeds that for the eurozone," said Mr Melllor.

"With interest rate differentials a key guide to the performance of euro/sterling this rather suggests that there remains further upside despite the pair's vault to all-time highs."

The pound dropped to a low of £0.9556 against the euro, its weakest level since the single currency's inception in 1999, before regaining some poise to stand at £0.9436, still down 1.6 per cent on the session.

The pound also fell 1.4 per cent to $1.5303 against the dollar.