The Bank of England was under intense pressure last night to cut interest rates after new figures showed the economy had contracted for the first time in 16 years as it heads into recession.

The news hammered the FTSE 100 index, which lost as much as 9% of its value at one point, wiping £90bn off the value of leading shares. It also clobbered the pound, which suffered its biggest fall against the dollar since 1992, to below $1.53 - a six-year low. As recently as July, the pound would buy $2, but it has been falling rapidly on evidence that the economy is slumping. The pound also hit a record low against the euro yesterday of just under 82p.

Official data showed gross domestic product contracted by 0.5% in the July to September period - a much bigger amount than expected, the first fall since early 1992 and the biggest drop since the fourth quarter of 1990.

"It's a big shock that the decline is so large. It is truly dire," said Philip Shaw, chief economist at Investec.

Barring a miraculous bounce in the current quarter, the economy will fulfil the technical definition of a recession - two quarters of contraction. Economists expect at least four more quarters of shrinkage in a row, which would be as bad as the recessions of the early 1990s or early 1980s.

Alistair Darling, the chancellor, said he was confident the British economy would get through this "difficult period" and reaffirmed the government's commitment to help individuals and businesses.

"I've lived through the recessions this country saw in the 1970s, 80s and 90s," he said. "The difference is this time we are determined to do everything we can, and as soon as we can, to help people so that if they lose their jobs they can get back into work, that if businesses get into difficulty we do our level best to help them."

His words followed an acknowledgment from Gordon Brown and the Bank of England's governor, Mervyn King, this week that recession was inevitable as a result of the global credit crisis and collapsing house prices.

George Osborne, shadow chancellor, dubbed it "a defining moment in the record of Gordon Brown" and said millions of British families were "in for a very difficult time in the months ahead".

He added: "This is the day that we can all see that the central claims he made over 10 years - that he had abolished boom and bust and therefore didn't need to set aside money for a rainy day - have been shown to be completely false."

The data from the Office for National Statistics showed that the fall in national output was widespread, with only agriculture and government services still growing. Statisticians said the biggest falls were in areas such as financial services and in manufacturing and construction.

The Liberal Democrat leader, Nick Clegg, warned the UK was "on the edge of a new winter of discontent".

He said: "These growth figures show that the credit crunch is hitting the real economy and harder and faster than was first feared."

Charles Bean, the Bank's deputy governor, warned that the economic slump was still in its early stages as a result of "possibly the largest financial crisis of its kind in human history". He added, though, that he hoped the worst of the crisis was past. But yesterday's figures largely related to the period before the collapse of investment bank Lehman Brothers in mid-September that led to the financial maelstrom of the past few weeks.

Economists said the current quarter and all of 2009 could see falling output and urged the Bank of England's monetary policy committee (MPC) to add to this month's half-point rate cut which took the bank rate down to 4.5%.

"My comment to traders was 'dive, dive, dive'," said Brian Hilliard, economist at Société Générale in London.

"It's a very emphatic entry into recession which underlines the need for very dramatic interest rate cuts which we think the Bank of England will deliver."

Speculation is growing in the City that the MPC could deliver its biggest ever cut in the interest rate at its next meeting on November 6, reducing it by one percentage point to 3.5%, or that it could hold an emergency meeting next week to cut the rate, such is the gravity of the situation.

The TUC's general secretary, Brendan Barber, said: "Urgent action should start with a cut in interest rates by the Bank to below 3%. The newly unemployed should be given more help by reversing cuts in Jobcentre Plus staff, increasing statutory redundancy pay and lifting the amount of redundancy pay that can be taken tax-free."