David Cameron seized on news of a sharp fall in unemployment on Wednesday as evidence that the coalition's economic plan is working, while City analysts warned that the rapid improvement in the labour market could trigger an earlier-than-expected rise in interest rates.

Mark Carney, governor of the Bank of England, has pledged to leave borrowing costs on hold at 0.5% at least until the unemployment rate hits a "threshold" of 7%. But since that policy was announced in August, employment has risen much faster than he expected.

Official figures showed that the unemployment rate fell to a four-and-a-half year low of 7.4% in the three months to October, down from 7.7% between May and July, prompting economists to predict that the Bank's threshold could be hit within months. Threadneedle Street has forecast that the threshold could be reached in 2015.

"The jobless rate is falling far faster towards the Bank of England's 7% threshold than policymakers envisaged," said Chris Williamson, chief economist at City data provider Markit. "Employment is surging higher and unemployment collapsing in the UK as the economic recovery has moved into a higher gear."

Speaking in the Commons, the prime minister said: "The plan is working, let's stick at it, and get unemployment down even further". He added: "there should not be one ounce of complacency because we have still got work to do to get our country back to work and everyone back in work means greater stability for them, greater ability to plan for their future, greater help for their families."

Allan Monks, UK economist at JP Morgan, said the news had prompted him to bring forward his forecast for a rate rise to the first quarter of 2015; but warned that, "the risks of an even earlier hike have increased". Carney has sought to stress that the jobs threshold is only a "staging post", and would not trigger an automatic rise in rates. But independent Bank policymaker Martin Weale said last week that "rapidly falling unemployment" would strengthen the case for higher rates.

The details of the jobs data reinforced the view that the labour market has improved markedly over the past six months. The number of people employed across the economy has hit a fresh record high, above 30 million, while there are more vacancies than at any time since the summer of 2008, before the UK slipped into recession.

On the claimant count, which measures the number of people receiving out-of-work benefits, unemployment fell to 1.27 million in November, its lowest level since January 2009.

John Philpott, director of the Jobs Economist consultancy, described the data as "wonderful". "The quarterly 250,000 net increase in total employment is as big as one might once have expected in a full year. Employment is up in all parts of the UK, except Northern Ireland, with a sharp rise in job vacancies helping an additional 50,000 16 to 24-year-olds into work. And while the overall figure of more than 30 million people in work still leaves the UK employment rate [72%] below the pre-recession rate [73%] it is a landmark worth celebrating," he said.

Despite the improving conditions in the labour market, there was little evidence that the prolonged squeeze on wages is easing, however. The ONS said total pay rose at an annual rate of 0.9% in October, or 0.8% including bonuses. That compares with an inflation rate of 2.2% in the same month, suggesting that on average, living standards are continuing to fall.

Frances O'Grady, the general secretary of the TUC, said: "These are undoubtedly positive figures, but we should not forget how far we still have to go to restore pre-crash living standards through better pay and jobs."

Rachel Reeves, the shadow work and pensions secretary, said: "Today's fall in unemployment is welcome, but families are facing a cost-of-living crisis and on average working people are now £1,600 a year worse off under this out-of-touch government."

The relentless fall in real wages may help to explain why consumer confidence has actually fallen over the past month, for the first time in a year, according to a new survey published on Thursday. Pollsters YouGov and City consultancy the Centre for Economic Business and Research say their consumer confidence index has slipped to 109.5 in December, from 110 in November. They suggest property prices have been a key driver of the more upbeat mood among consumers in 2013. Stephen Harmston, of YouGov, said: "This month's fall in consumer confidence highlights the fact that the economic recovery is far from being a done deal in the eyes of many people. The surge in house prices in the last year has inflated consumer confidence, masking the underlying economic fragility in people's day to day lives".