Darling sends pound diving

The markets sent sterling plunging to 81.39p to the euro, the lowest since the European currency was founded in 1999, in the first trading since Mr Darling said Britain was facing its worst squeeze for 60 years.

Combined with speculation that Gordon Brown was set to sack his Chancellor, fears that Britain was set for a longer slowdown sent the pound falling to $1.80 against the dollar, the worst in two years.

Tory leader David Cameron accused Mr Darling of triggering a "crisis of confidence" and warned that his claims about the difficulties facing the UK risked "talking the economy down".

The Prime Minister tried to reassert his authority by seizing control of Labour's economic recovery plans, including proposals to help hard-pressed homeowners and first-time buyers.

He will also use a speech to business leaders this week to contradict Mr Darling's gloomy prognosis and claim instead that Britain is set to benefit from "new business, new jobs and prosperity" as the world economy doubles in the next 20 years.

But City economists said that reports of a split between No10 and No11 Downing Street, together with fears that Mr Darling was telling the truth about the state of the downturn, were enough to send the pound plummeting.

Ian Stannard, senior currency strategist at BNP Paribas, said: "Most people believed that things were probably deteriorating faster in the UK than the Government was admitting, but the fact that we've seen the Chancellor come out and admit that things are far worse have put sterling under pressure."

Simon Derrick, chief currency strategist at Bank of New York Mellon, said: "The last thing you want to hear is there is a split at the top between the Prime Minister and the guy running the economy. It does not fill investors with a great deal of confidence so I don't think it's surprising sterling has collapsed."

Sterling also weakened ahead of Thursday's interest rate decision. It is widely expected that the Bank of England will keep rates at five per cent for this month after inflation hit a 16-year high of 4.4 per cent.

Mr Cameron rounded on Mr Darling's "60 years" comments, telling Radio 4's Today programme: "I think it's extraordinary that the Chancellor said it because the Chancellor of the Exchequer has got to think not only, 'I must tell the truth at all times' but also, 'I must use my words carefully so that I don't create a situation that's even worse'."

Downing Street today insisted that the Prime Minister had "full confidence in the Chancellor" but at the same time refused to comment on the prospect of any reshuffle. Whitehall insiders said that Mr Darling had been categorically "wrong" to declare in his weekend interview that there would be no Cabinet shake-up in the near future.

Mr Darling is set to downgrade his growth forecasts in the pre-Budget report this autumn and some allies suggest he was trying to prepare the country for the bad news in advance. The Chancellor is expected to appear alongside Mr Brown tomorrow, together with Communities Secretary Hazel Blears, as they unveil new help for first-time home-buyers and people facing repossession.

In an interview published in The Guardian on Saturday, Mr Darling admitted voters were "pissed off" with the Government and said conditions were "arguably the worst they've been in 60 years". He later insisted he was referring to international conditions, and not the state of Britain's domestic economy. Asked whether there was any truth in reports of a rift between No 10 and No11, Mr Brown's spokesman said: "I don't recognise those at all."

When asked about Mr Darling's claim that the public are "pissed off" with Labour, the spokesman referred to Mr Brown's focus on global rather than British problems. "Clearly, these are challenging economic times that are facing all countries at the moment," he said.