Mervyn King, governor of the Bank of England, has warned that Britain is on the brink of a period of prolonged hardship.
Speaking in Leeds last night, he said: "It seems likely that the economy is entering a recession."
After his statement, the pound fell to a five-year low against the dollar.
He added: "The combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand."
Mr King is the first major figure to openly warn of a recession, whereas some ministers have shied away from using the word.
Meanwhile, analysts at Ernst & Young have said the UK is already in a recession, adding that house prices will fall by another 14 per cent this year, with improvement not expected until 2010.
The Ernst & Young ITEM Club has also said the economy will shrink by one per cent next year, but offered good news in the form of falling interest rates and lowering inflation.
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