The Bank of England was today urged to slash interest rates by a full percentage point as central bankers around the world faced mounting pressure to tackle the global recession.

City grandee Sir Howard Davies, a former Deputy Governor of the Bank and chairman of the Financial Services Authority from 1997 to 2003, said: “I would definitely be going for half a per cent...I might well go for 1%.”

The Federation of Small Businesses also called for a cut from the current 4.5% to 3.5%, possible as early as this week. “Inflation is yesterday's story,” a spokesman said. “It's about the economy now.”

The comments came on another bloody day for the London markets, where shares and the pound again tumbled in the wake of major retreats by Far East markets.

The FTSE 100 index was down 116.72 points at 3766.63 while sterling sank 5.03 cents against the dollar to $1.5387.

A full percentage point cut would be the biggest by the Bank since it was granted independence in 1997. Nick Kounis, a former Treasury official and now an economist at Fortis, said such a move was “a very real possibility”.

The Bank's monetary policy committee is not due to meet until next week but hopes are rising that it will hold an emergency session before then and cut rates aggressively as Britain plunges into recession.

It voted for an emergency rate cut from 5% to 4.5% earlier this month in a co-ordinated move with other central banks including the US Federal Reserve and European Central Bank.

The Federal Reserve is expected to cut rates in the US from 1.5% to 1% on Wednesday, although this could be brought forward to tomorrow, paving the way for the British and European policymakers to again act earlier than scheduled.

David Page of Investec Securities said: “With the banking sector still on its knees and a host of appalling economic news posted over the past few weeks, the need for further monetary stimulus is apparent.”

Aggressive rate cuts would be good news for millions of borrowers in Britain desperate for lower mortgage repayments, although there is no guarantee lenders will pass on the cuts to customers.

Libor, the rate of borrowing between banks, which dictates the price of many mortgages, eased again today but is still a long way above the Bank Rate as the freeze in the credit markets thaws only very slowly.

Three-month sterling Libor was down from 5.98% to 5.95% but overnight rates rose over six basis points (0.06 of a percentage point) to 4.81% as money markets were again hampered by mounting fears of recession and continuing ructions in the financial markets.