Vacancies in City fall by 40 per cent

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Such a large growth in dole queues would leave the Treasury facing a multibillion pound increase in benefits bills.

Rising inflation is already due to add £3 billion to pension and welfare bills.

City headhunter Morgan McKinley said the number of jobs on offer in the Square Mile and Canary Wharf sank to 5,922 last month from 6,867 a month earlier - and more than 40 per cent lower than a year ago.

The number of workers looking for a new job in finance jumped from 7,080 in August to 10,050 last month - 42 per cent more than the same period last year.

The change in work prospects in the City, which has seen the average salary drop three per cent to £49,893 over a year, comes after the violent upheaval of the financial system following the collapse of Lehman Brothers and as the UK moves towards recession.

Robert Thesiger, chief executive of Morgan McKinley's parent company Imprint, said: "These are unprecedented times for the industry. There was an influx of candidates coming onto the market last month, largely as a result of the instability."

Figures out today are expected to show another significant rise, from 1.72 million, in the number of people out of work. John Philpott, chief economist at the Chartered Institute of Personnel and Development, issued a gloomy unemployment prediction.

"The worst is yet to come," he said. "Our expectation is it will peak at over 2.25 million - about 500,000 up at where we are at present. Unemployment will keep rising throughout most of 2009."

If unemployment peaked at 2.25 million, it would not be as bad as the recessions in the Eighties and Nineties, he added. The TUC has predicted a rise in the numbers published today to 1.75 million. The Government has made an extra £100 million available to retrain workers who lose their jobs.

The Rossi index, used to assess increases in unemployment, housing and other income-related benefits, jumped 6.3 per cent. Gemma Tetlow, a senior research economist at the Institute for Fiscal Studies, said: "The Government may now find itself spending around £3 billion more next year on benefits."

The pension and benefits bill for the Treasury was already forecast to be £131.9 billion this year.