Britain's days as the fastest growing economy in Europe were officially declared over yesterday as the deepest recession in a generation saw consumers turning off the lights and Poles returning home.

While official figures showed the economy contracting at its fastest since 1980, National Grid said demand for electricity had fallen over Christmas at homes and factories across the land, and Poland confirmed that thousands of its citizens were coming home from Britain and Ireland.

National Grid said it was cutting its forecast for electricity consumption this year because of the recession. The thousands of people being laid off each week and the hundreds of firms cutting production are reducing demand.

Industry has suffered most in this recession and made the biggest contribution to the slump in national output, which fell by a worse-than-expected 1.5% in the fourth quarter of last year compared to the third - or around 6% on an annualised basis.

As the economy had contracted by 0.6% in the July to September period, Britain now meets the most common definition of a recession - two consecutive quarters of shrinkage. But some analysts say the country fell into recession last April.

Financial markets took fright at the sheer speed of the economy's contraction, which outpaced anything seen in the recession of the early 1990s.

The pound slumped to a fresh, 23-year low against the dollar of just $1.35 - a far cry from the peak of $2.11 seen last summer - and to an all-time low against the yen. The FTSE 100 share index fell below the key 4,000 level after the news, although it later recovered to end little changed.

"These figures are the final nail in the coffin for Gordon Brown's claim to have 'ended boom and bust'. The UK economy is most definitely bust at the moment," said Charles Davis at the Centre for Economics and Business Research.

"It is not just that the UK has entered recession; it is the size of the contraction ... The economy is set for the steepest contraction in the post-war era in 2009."

Brown admitted the government had not seen what was coming: "What we did not see, nobody saw, was the possibility of markets' failure.

"We are fighting this global recession with every weapon at our disposal. We need other countries to work with us and we are asking them to agree with us a common set of measures."

He criticised David Cameron for having suggested Britain might need to go to the IMF for help in financing its bail-out of the creaking banking system. But Cameron insisted he was right to warn that the country faced the prospect of an IMF loan for the first time since 1976. "I think it's right to warn about that, I think it's a responsible thing to do," Cameron said.

He and the shadow chancellor, George Osborne, mocked Brown's claims last summer that the economy was better placed than in the past to withstand recession and would grow in spite of the credit crunch.

But TUC chief Brendan Barber blamed bankers and previous Tory governments for the economic mess: "This recession is not bad luck or an inevitable swing of the pendulum. Its cause is irresponsible behaviour by banks and financial institutions taking advantage of the deregulation started by Mrs Thatcher and president Reagan, and continued to a greater or lesser extent ever since."

Unemployment was this week reported to have jumped to nearly two million, and analysts say it would be much higher were it not for workers from countries such as Poland returning home.

Poland's treasury minister Aleksander Grad told the Guardian that the economy there, unlike Britain's, would avoid recession. Poland's banks had been regulated tightly and had not got into the toxic derivative products that have brought down banks around the world, said Grad.

National Grid said weekly peak electricity demand would fall by 600-1,000 megawatts, the equivalent of a large power plant, over the next year. The drop will ease the strain on power stations, some of which are facing closure because of age or environmental rules. It will also reduce CO² emissions.