By David Milliken and Christina Fincher
LONDON (Reuters) - Britain's economy contracted unexpectedly in the third quarter of this year, official data showed on Friday, quashing hopes the downturn was ending and instead marking the longest recession on record.
Sterling plunged more than a cent against the dollar and government bond futures surged as traders and analysts bet the Bank of England may now have to expand its quantitative easing program of buying up debt market assets to secure a recovery.
The figures were also a blow to the Labour government, trailing in opinion polls and hoping for recovery to take hold well before an election due by next June.
The Office for National Statistics said British gross domestic product fell by 0.4 percent between July and September, meaning the economy has contracted for six successive quarters for the first time since records began in 1955.
This was much worse than analysts' expectations of a 0.2 percent rise. Not a single analyst out of the 35 polled by Reuters before the data had predicted a negative reading.
"Third quarter GDP is awful, with no positive news within the report," said James Knightley, economist at ING.
"More worryingly from sterling's perspective is the fact that the UK may be the only major economy to have contracted in the third quarter."
The length of the downturn could prove an embarrassment for Prime Minister Gordon Brown's Labour Party, particularly as Germany and France are already out of recession.
'WORST RECESSION IN 60 YEARS'
British finance minister Alistair Darling said he still expected growth to return by the turn of the year, reiterating a forecast made in the budget in April. Darling will update that forecast in the prebudget report due in the next few weeks.
"We're facing the worst global financial crisis and recession in 60 years," he said. "We've always said that we remain cautious as a result of the high degree of economic uncertainty."
"That's all the more reason to continue the action the government is taking. To remove it now would be madness."
Year-on-year, output shrank by 5.2 percent, only marginally better than the record 5.5 percent annual fall registered in the second quarter. The quarterly decline between April and June was unrevised at 0.6 percent.
The ONS said there had been a peak-to-trough GDP fall of 5.9 percent during the current recession, compared to 6.0 percent between the second quarter of 1979 and the first quarter of 1981 -- a period when there were some quarters of growth.
Analysts had been pinning their hopes for recovery on months of survey evidence that had pointed to a sharp rise in confidence and activity in the services sector, which makes up three quarters of Britain's economy.
"What is most striking is the still-weak contribution from the services sector," said Stephen Lewis, economist at Monument Securities.
Services contracted by 0.2 percent over the quarter, with the distribution, hotels and catering sub-sector leading the decline with a 1.0 percent quarterly drop.
Economists had already expected industrial output to be weak, following a sharp monthly drop in August, and the GDP data bore this out. Industrial production fell by 0.7 percent over the quarter, taking its annual decline to 10.4 percent.
(Additional reporting by Matt Falloon; editing by Chris Pizzey/Ruth Pitchford)
