Shadow Chancellor Francis Maude said: "Sadly, this reduction may not be enough. Most people in business tell me that nothing less than a 1% cut in rates will be enough to stop the country sliding towards recession next year."

He said the Bank of England's statement showed it did not believe Chancellor Gordon Brown's "fantasy forecasts" for growth, which predicted slower growth next year followed by a smart bounce back the year after.

Mr Maude said: "The Bank clearly thinks that the British economy is slowing very quickly, as we have been warning for months."

And in the Commons later, he challenged Mr Brown: "Isn't it now clear that not even the Bank of England believes the chancellor's fantasy forecasts?

"When's he going to bring his forecasts in line with the majority independent economists and start taking some serious policy steps to avoid the rising toll of job losses and business closures?"

Mr Brown hit back by quoting Mr Maude who had said it was less likely interest rates would be cut and accused his shadow of being in search of soundbites.

The Bank agreed with him that there would be moderate growth, he said.

'Deficit in thought'

"It's about time the shadow chancellor woke up to what's happening in the real world," he said.

"The real deficit in this country is the deficit in Conservative thinking," Mr Brown taunted.

The chancellor came under pressure from a string of Tory MPs over economic pressures on business and job losses, but reiterated he was aiming for long-term stability, reminding the House how interest rates had hit 15% under the Conservatives.

Tory former chancellor Kenneth Clarke said interest rates had come down as a result of a slowdown which Mr Brown himself had created, and the world slowdown was coming on top of that.

But the chancellor believed over time all political parties would back his giving independence to the Bank of England.

Under the last government, every month, he reminded the House, the Bank was warning rates needed to go up, but the government did nothing while Labour took immediate action.

Jobs worries

Liberal Democrat Treasury spokesman Malcolm Bruce said the cut was a step in the right direction.

Another cut needed, says Malcolm Bruce

But he added: "Further interest rate cuts will be necessary to protect hundreds of thousands of jobs at risk in manufacturing industry.

"Today's bleak news of a big monthly fall in industrial output is confirmation of severe difficulties facing manufacturers."

His views were reflected by the Confederation of British Industry, which called for a further drop in rates next month.

Chief economist Kate Barker said: "I would hope to see at least another quarter-point (cut) by the end of the year.

"In the service sector in particular there is still some indication earnings could rise a little further. But manufacturing pay settlements have certainly come off the boil."