The government's five weeks of turmoil since George Osborne's badly received budget have taken a fresh turn for the worse with the latest set of growth figures showing Britain plunging into its first double-dip recession since 1975.

On a day that saw David Cameron under pressure to sack the culture secretary, Jeremy Hunt, over his handling of News Corp's attempt to mount a full takeover of BSkyB, the chancellor admitted Britain faced a long struggle to pull out of the deepest recession and the weakest recovery of the postwar era.

In a BBC interview, the chancellor said: "I've never disguised the fact that Britain faces a very difficult economic situation. We have these debts, we have this debt crisis; these debts were built up over many, many years."

He added that if he had a magic wand he would wave it. Instead, he said, "we've got to work our way through the problems that have been built up over many years".

News that the economy contracted by 0.2% in the first three months of 2012 surprised the City, which had been confident that the UK had avoided two quarters of falling output – the technical definition of a recession. The return to recession so soon after the last one ended in 2009 makes it a "double-dip".

Although some analysts said the official data painted too pessimistic a picture of the economy and would probably be revised up, there were fears that the loss of output caused by the Queen's diamond jubilee bank holiday in June could result in a third quarter of declining activity.

Labour seized on the news and accused the government of a recession made in Downing Street. The shadow chancellor, Ed Balls, said: "David Cameron and George Osborne complacently boasted their austerity plan had taken our economy out of the danger zone, but their failed policies have plunged us back into recession.

"We consistently warned that their austerity plan was self-defeating and that cutting spending and raising taxes too far and too fast would badly backfire. David Cameron and George Osborne arrogantly and complacently dismissed people who warned of the risk of a double-dip recession and the country is now paying a very heavy price. Their economic credibility is now in tatters."

Responding to news that a big fall in construction output and a smaller decline in manufacturing production had caused the economy to shrink for the fourth quarter in the last six, the prime minister told MPs: "These are very, very disappointing figures. I don't seek to excuse them, I don't seek to try and explain them away."

With local elections and the key London mayoral fight looming next month, Osborne made it clear that there would be no U-turn from the government on its deficit-reduction strategy and said his approach was supported by business groups and multilateral bodies such as the International Monetary Fund.

The chancellor fears that backsliding would be punished by the financial markets, and he is relying on the Bank of England to boost activity.

"It is made much harder when so much of the rest of Europe is in recession or heading into it," the chancellor said. "The one thing that would make the situation even worse would be to abandon our credible plan and deliberately add more borrowing and even more debt."

The City sees no prospect of interest rates being raised from their record low of 0.5% before the end of 2013 at the earliest and said further electronic money creation by Threadneedle Street to extend its £325bn quantitative easing programme should not be ruled out.

Gerard Lyons, chief economist at Standard Chartered Bank, who warned late last year that the economy would contract by 0.5% during 2012, said the UK might face a long struggle following the breakdown of an economic model based on high levels of borrowing and lending. "Expectations have run ahead of reality," Lyons said. "Everybody has been thinking there is going to be a recovery soon. But balance sheet recessions always take a long time to turn around."

Unlike the United States or Germany, UK economic output has yet to return to the levels before the recession began four years ago. Activity is still more than 4% lower than it was at its peak in early 2008 and has recovered more slowly than it did after the Great Depression of the 1930s.

Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, said: "Since the last general election, the UK has been bumping along the bottom with growth sometimes a bit above, sometimes a bit below zero. The Bank of England's quantitative easing has failed to offset the negative impact of government spending cuts in the way cuts in interest rates would have.

"In the US, where austerity exists only in rhetorical form and not in reality, the recovery from the 2008 slump continues to gather momentum and unemployment is falling. Growing your way out of debt looks like the better strategy."

The TUC general secretary, Brendan Barber, said: "Austerity isn't working. The government should look across the Atlantic and follow President Obama's alternative that has reduced unemployment and brought growth back to the USA."

The CBI provided one piece of good news for the chancellor, with the quarterly snapshot of manufacturing from the employers' organisation showing order books, output and business confidence on the rise.

In recent quarters, however, the hard data from the Office for National Statistics has tended to be gloomier than suggested by business surveys.