The economy shrank by 0.4 per cent between July and September, defying economists' expectations that Britain had emerged from recession with 0.2 per cent growth.

"The GDP number was a real jolt," said Danny Gabay, a former Bank of England economist who works at Fathom Financial Consulting.

Andrew Smith, chief economist at KPMG, said the third-quarter performance made "this the worst recession in modern time". Britain's output is now down almost 6 per cent from its peak and has contracted for six successive quarters, making it the longest recession since quarterly records began in 1955.

The figures were a setback for Prime Minister Gordon Brown.

With less than eight months before the next general election, Mr Brown is counting on an economic revival to boost his Labour Party and erase the advantage in opinion polls the Conservatives have enjoyed for almost two years.

Production and construction industries contracted broadly in the third quarter, as expected, but a 0.2 per cent fall in output in the dominant services industry surprised economists.

The Office for National Statistics figures, released on Friday, showed that every sector contracted except a flat public sector.

Economists said the drop in output made it more likely that the Bank of England would expand its £175 billion ($309 billion) quantitative easing (QE) program in November. Gilt yields fell sharply on heightened expectations that QE would be extended.

Britain's banks are benefiting from loose monetary policy, with low interest rates making it cheaper to borrow, while QE is enabling banks to make extra profits on their gilt transactions.

The pound weakened because of the poorer outlook for the British economy. It closed down 2.4 cents against the US dollar at $1.63, and off 1.7 cents against the euro at €1.0878, wiping out gains early last week. Yet equity markets shrugged off the GDP data, with the FTSE 100 rising 35.2 points to 5242.57.

Britain is lagging behind other major economies, including Germany and Japan, which returned to growth in the second quarter.

"This recession looks more like a depression," said John Philpott, chief economist at the Chartered Institute of Personnel and Development.

A combination of rising house prices, rising equity markets and a slowing rate of unemployment growth had widely supported the expectation the British recession ended in the third quarter.

Alistair Darling, the Chancellor of the Exchequer, insisted the figures were in line with his forecasts. "I've always been clear that growth will return at the turn of year," he said.

Shadow chancellor George Osborne said "Britain urgently needs new economic leadership".

Economists said the first estimate from the Office of National Statistics could be revised when it had gathered more data. "Previous GDP figures have tended to be revised up more than down, and the same may well apply here," Citigroup economist Michael Saunders said.