The pound fell to its lowest against the dollar in five years and the FTSE 100 index of leading shares was nearly 6 percent lower as the first reading of Q3 GDP among the Group of Seven industrialized nations rattled investor confidence.
Futures markets moved to price in a higher chance that the Bank of England would cut interest rates by another 50 basis points in November, following this month's emergency cut to 4.5 percent from 5 percent.
The 0.5 percent drop in gross domestic product in the three months to September was the biggest since Q4 1990 and the first contraction since Q2 1992, the Office for National Statistics said.
"It's a very emphatic entry into recession which underlines the need for dramatic rate cuts -- which we think the Bank of England will deliver," said Brian Hilliard, economist at Societe Generale.
"We're looking for a 50 basis point cut in November and a rapid succession of cuts to about 2.5 percent by the middle of next year."
HEADED FOR RECESSION
Speaking just before the data were released, BoE policymaker Andrew Sentance said the risks of a severe downturn had increased.
Prime Minister Gordon Brown, who for a long time boasted of ending boom and bust, admitted on Wednesday Britain was likely to fall into recession -- normally defined as two successive quarters of economic contraction -- as all major economies were suffering because of the global financial crisis.
That echoed a similar warning from Bank of
On the year, GDP was 0.3 percent higher, the weakest rate of growth since Q2 1992.
All sectors of the economy posted declines on the quarter apart from agriculture, which makes up 1 percent of GDP, and government, which makes up about 23 percent of GDP.
Fourth quarter GDP data could turn out to be even worse given the fact that the escalation in the financial crisis only took hold in September.
"News since the end of September has hardly been encouraging and the