The pound slumped to fresh three-month lows today as investors began fearing the worst for the British economy.

With Bank of England Governor Mervyn King for the first time mooting the possibility of recession, sterling slid 0.85 cent against the dollar to $1.9405. Shares reversed early gains after King's gloomy predictions on prices and economic growth, the FTSE 100 index slipping 32.1 to 6179.8.

Analysts said the bad news in the Bank's quarterly inflation report suggested an interest rate cut in June now looked unlikely. That would normally trigger a rise in the value of sterling but, given the increasingly dire prognosis for the economy, it dropped instead.

Jonathan Loynes at Capital Economics said: "A June interest rate cut now looks pretty unlikely, and any further loosening will be modest in the foreseeable future - seriously bad news for the economy."

But he and several other experts believe inflation will eventually ease as the global economy cooled.

James Knightley at ING said the Bank was being overly pessimistic on inflation but not negative enough on economic growth. He added that weaker global growth would dampen the price rises of commodities, which have been fuelled by demand from economies such as China and India.

Rising unemployment, falling house prices and consumer confidence at 16-year lows would hit the economy more than the Bank expected, he said.

The Bank has cut interest rates three times since December, to 5%. Much of that has not been passed on to the public in the form of cheaper mortgage repayments because Libor, the rate at which banks lend to each other has remained high. It today increased to 5.79750% from 5.77313%.