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Banks were today under renewed pressure to increase lending after figures showed they are still starving cash-strapped firms and households of vital funds.
The Bank of England said net lending to UK businesses fell by a record £15.5 billion in July, which meant companies paid back far more than banks lent out.
Mortgage lending was also sharply down in August, despite signs over the summer that the housing market was on the road to recovery.
It rekindled fears a shortage of bank lending will kill any rebound in the economy and prolong the downturn.
Alan Clarke, an economist at BNP Paribas, said: "It shows the scale of the problem we have got is intense."
Business groups and economists urged the Bank to extend rather than reverse its £175 billion quantitative easing scheme to boost the amount of money flowing through the economy.
There were also calls for it to cut interest paid to commercial banks for deposits they hold at the central bank.The Swedish central bank cut this rate to negative in July - meaning banks had to pay to hold money at the Riksbank - in the hope it would force them to lend rather than hoard funds.
But Clarke said: "Even if they cut the remuneration rate on reserves, it's probably not going to get lent to households and businesses, so we are going to have this fundamental drag on activity growth for quite a while.
"It's too early to consider an exit strategy and more likely they are going to expand quantitative easing."
The slump in lending to businesses in July was broadly equal to the combined drop of £15.6 billion over the previous three months.
The Bank warned that it fell further in August - robbing firms of the funding they need to survive the recession and drive economic growth.
Separate figures showed Government borrowing hit £16.1 billion last month - the highest for any August on record - as the recession hit tax receipts and jobless benefit costs soared.
Jonathan Loynes, chief European economist at Capital Economics, said: "This data underline the two biggest threats still facing the economy - weak bank lending and the prospect of a major fiscal tightening."
Statisticians on Threadneedle Street blamed the slump in lending to businesses on both weak demand - as firms retrench during the recession - and banks' reluctance to make loans. Many overseas and specialist lenders have also withdrawn from the market.
"The availability of finance remains more constrained for smaller companies," said the Bank in its September Trends in Lending report.
"Smaller companies faced tougher lending criteria and higher loan spreads than larger companies, because they are less well diversified and hence less able than larger companies to withstand adverse shocks."
The Council of Mortgage Lenders said home loans fell 13% from £14.5 billion in July to £12.6 billion in August.
Nicholas Leeming, director of propertyfinder.com, said: "The total value of mortgage lending remains woefully low. The difficulties home buyers face in obtaining mortgage finance remain the biggest obstacle in the path of housing market recovery."
