Britain's manufacturing sector plunged deeper into recession today as factories were swamped by the worst conditions since the early 1990s.

Output plunged last month along with new orders from home and abroad, and firms slashed jobs as the crisis in financial markets hit the wider economy.

However, the Chartered Institute of Purchasing and Supply (Cips) survey also found inflationary pressures eased in September as the price of oil and other raw materials fell.

Signs that inflation may be reaching its peak raised hopes that the Bank of England could cut interest rates next week to bolster economic growth.

Cips said its headline barometer of activity in the manufacturing sector — where 50 marks the cut-off between boom and bust — crashed from 45.9 in August to just 41 last month.

It was the weakest reading since records began 17 years ago and far worse than City economists had predicted.

Roy Ayliffe, director of professional practice at Cips, said: "Given the unprecedented chaos in global economies, there was little respite for UK manufacturers in September as the sector suffered the worst operating conditions so far recorded in the survey's 17-year history.

"Purchasing managers saw levels of output and new work tumble as firms were hit by weakening domestic and foreign demand.

"In turn, jobs were axed for the fifth month running in an effort to downsize and cut costs.

"One hopeful area for the [Bank of England's] monetary policy committee, however, was the slowing of inflation. Input cost inflation eased to a seven-month low as September saw the price of oil and other key commodities fall slightly."

Economists warned, however, that a cut in rates from 5% to 4.75% was unlikely to be enough on its own to boost growth given that Libor, the interbank lending rate which dictates the cost of mortgages and business loans, has rocketed so far above the official Bank Rate.