Image caption January's drop in manufacturing output came after a rise the previous month

The pound fell against the dollar and euro after official figures showed UK manufacturing output fell in January from a month earlier.

The pound hit a two-and-a-half-year low of $1.4832, before later recovering to $1.4902.

Output fell by 1.5%, following a 0.9% rise in December, adding to fears the UK will dip back into recession.

Meanwhile, a leading think tank estimated that the economy contracted between December and February by 0.1%.

The National Institute of Economic and Social Research (Niesr) also revised its output estimate for the three months to January from flat to a contraction of 0.2%.

'Difficult outlook'

The manufacturing output figures from the Office for National Statistics (ONS) were weaker than expected, and come the week before Chancellor George Osborne announces his latest Budget.

Mr Osborne has come under pressure to introduce stimulus measures in the Budget to try to revive growth.

The UK economy contracted in the final three months of 2012, and the UK will be back in recession if economic activity shrinks this quarter.

Labour said that the manufacturing statistics were "terrible figures" but Mr Osborne said he had taken action to protect the sector.

"The steps we have taken to support manufacturers, to help with investment allowances as I've announced, to make sure they have access to those growth parts of the world like China and India, this is all part of rebalancing and rebuilding the British economy," he said.

However, economists said the manufacturing figures increased the chances of the UK falling back into recession.

"This [manufacturing data] is the penultimate nail in the coffin in terms of triple-dip - it's pretty much game over now," said Alan Clarke, an economist at Scotiabank.

"Unless we have a stellar performance from the services sector, we're almost certainly in a triple dip."

Mike Rigby, head of manufacturing at Barclays, said that, after a positive end to 2012, January's manufacturing figures showed "that the outlook remains difficult with uncertainty set for the medium-term".

He added: "Manufacturing has long been seen as a precursor for the UK economy, and therefore it's no surprise that current activity mirrors the challenging economic environment."

Last month, ratings agency Moody's cut the UK's AAA credit rating, which hit the pound, and the value of sterling has continued to edge down since then.

Media playback is unsupported on your device Media caption Rabobank's Jane Foley says January's data "wipes out" December's growth

Since the turn of the year sterling has fallen by more than 7% from $1.62.

Export strategy

The ONS said that industrial output, a wider measure which takes into account energy production and mining, fell 1.2% in January after a 1.1% rise in December, partly due to a shutdown of a North Sea oil field.

The mining and quarrying sector also saw a drop in output, and within manufacturing there was a fall in the production of pharmaceuticals and building materials.

Meanwhile, the ONS said the goods trade deficit narrowed to £8.195bn in January from £8.738bn in December. The goods trade deficit with non-EU countries also narrowed to £3.280bn from £4.169bn the month before.

The chancellor will give his fourth Budget speech on 20 March at 12:30 GMT There is full coverage of the Budget and how it affects you on the BBC News website You will also be able to watch the event on a special programme on BBC Two and the BBC News Channel from 11:30 GMT See full Budget coverage here

Both the trade deficit figures were at their lowest since July. However, while the trade gap is shrinking the figures show that total goods exports decreased by £900m, or 3.5%, to £24.4bn, as total imports fell by £1.4bn, or 4.2%, to £32.6bn.

Although it welcomed the improved deficit figures, the British Chambers of Commerce said more could be done to boost overseas trade.

"More effective action is needed to ensure that the considerable untapped potential of many British exporters can be used to drive a sustainable recovery.." said the BCC's chief economist, David Kern.

"The government must implement the measures it has already announced to support companies seeking to break into new markets.

"We clearly need a national export strategy that focuses on key areas such as trade finance, promotion, and insurance, and would enable British companies to compete in the global arena."