Britain's economy may be deeper in recession than previously thought after official data showed that industrial output plummeted at the fastest rate in nearly six years in October, with previous months also weaker than estimated.

The figures, described as a "horror story" by one economist, raised expectations in the City that interest rates will have to be cut aggressively again and that they could fall close to zero next year.

The Bank of England has already slashed borrowing costs by three percentage points since October to 2%, a 57-year low, in a desperate - and some say belated - attempt to kickstart the economy.

The pound fell against the euro and the dollar following the news, dropping by over 1% to $1.4742. The euro rose to 87.25p, closer to its recent record high of 87.38p.

Industrial production, which comprises manufacturing, mining and utilities, fell by 1.7% in October from the month before, the Office for National Statistics reported this morning. The fall was more than three times the size predicted by City economists and the biggest drop since January 2003. It took output down 5.2% from a year ago, the steepest annual decline since April 1991.

The ONS also revised down output in previous months and said, other things being equal, that would mean GDP contracted by 0.6% in the third quarter of 2008 instead of the 0.5% fall initially reported. Britain will officially be in recession once the fourth-quarter GDP figures, which are expected to show a sharp contraction, are published in late January.

Industrial production was down 1.4% in the third quarter from July to September, worsening to a decline of 1.8% in the three months to October.

Philip Shaw, chief economist at Investec, said the latest data was a "horror story". "We've seen a number of sharp declines in recent months and if anything the pace of contraction appears to be worsening. The implication is that fourth-quarter GDP is going to look very poor indeed, which certainly cements our view that interest rates will be close to zero during the second quarter of next year."

James Knightley at ING said he expects GDP to contract by close to 1% in the fourth quarter, followed by a similar outcome in the first quarter of next year. "Consequently, the Bank of England has more work to do with a growing likelihood that UK rates will eventually get down to zero."

Andrew Sentance, who sits on the Bank's monetary policy committee, warned today that the recession was likely to be as long and deep as the previous three major downturns in the mid-1970s, early 1980s and early 1990s. Speaking at a conference in London, he said monetary policy has been relaxed "dramatically" but this will take several quarters to have an effect.

"Interest rates started to be cut at an earlier stage of this downturn than was the case in previous UK recessions," Sentance said.

Manufacturing production fell by 1.4% in October, much faster than expected and the eighth monthly slump. That was the biggest drop since March 2005 and marked the longest run of declines since 1980. The slump was widespread across manufacturing, with printing and publishing particularly weak, followed by the metals and transport equipment sectors, including cars.

Matthew Sharratt at Bank of America said the figures were "really horrible". He said: "The real worry is that potentially we have not seen the worst of it. The recession in manufacturing is tightening its grip. The prospect for manufacturing and the economy as a whole is dismal. The Bank of England will have to cut interest rates."

Separate figures from the ONS showed that Britain's trade in goods gap with the rest of the world widened slightly to £7.75bn in October.

Japan is also deeper in recession than previously thought. Official figures released earlier today showed that the Japanese economy shrank by 1.8% in the third quarter of the year, on an annualised basis, compared with an earlier estimate of 0.4%.