Pound and shares dive amid doubts over recovery

Sterling reversed early gains to stand down 0.59 cents to $1.6228 and 0.14 cents to 1.1348. The FTSE 100 index was also off 26.11 points to 4882.79 having fallen as low as 4836.

David Jones, chief market strategist at IG Index, said: "The latest batch of UK economic news has proved to be a little unsettling for those looking for further green shoots.

"The man in the street is still taking a cautious approach to spending and any perceived UK recovery is not being consumer led just yet."

It came after a raft of economic data showed:

* The manufacturing sector slipped back into recession last month as firms cut jobs and growth in new orders stalled. The Chartered Institute of Purchasing and Supply (CIPS) said its headline measure of activity, where any reading below 50 represents contraction, fell from 50.2 in July to 49.7 in August.

* Mortgage approvals hit a 15-month high, up from 47,891 in June to 50,123 in July, according to the Bank of England, as cheaper homes and low interest rates lured buyers.

* But mortgage repayments outstripped new lending for the first time since the Bank started keeping records in 1993. Homeowners repaid £418 million more than was advanced as the credit crunch continued to restrict new lending.

* Overall lending to individuals contracted by £635 million as borrowers also repaid more unsecured debt. Borrowing on credit cards rose by £92 million but repayments on loans and overdrafts totalled £309 million.

* The supply of money to households and businesses remained muted despite increased funds held by banks thanks to the Bank of England's £175 billion printing money programme.

"All told, today's numbers are a reminder that the economy is nowhere near out of the woods yet," said Colin Ellis at Daiwa Securities.

There was particular disappointment at the CIPS numbers for August after the July survey showed growth for the first time since April last year.

CIPS chief executive David Noble said: "The future picture for the UK manufacturing sector is still uncertain, and concerns will remain that the improvements seen in recent months may have been temporary rather than a sustainable recovery."

Figures last week showed the UK economy shrank by 0.7% in the second quarter, not as bad as the 0.8% slump initially reported. It followed a 2.4% contraction in the first quarter and three quarters of decline last year.

It is hoped the economy started growing again in the current third quarter.

But James Knightley of ING branded today's numbers "very disappointing" and "a temporary setback".