The Bank of England has acknowledged for the first time that the UK economy is currently on the verge of recession.

Coming soon after it was reported that the rate of inflation has now hit a 16-year-high of 4.4%, with further increases widely expected, the Bank's governor Mervyn King has warned that the economy will start to shrink by the end of 2008.

This will represent the first such decline since the early 1990s and, as energy prices continue to rise, Britain could be hit by the worst financial crisis for more than half a century, Mr King told the Telegraph.

"It is bound to be the case there will be a quarter or two of negative growth. Oil prices are at the highest level in real terms at any point in the post-war period apart from the late 1970s, and we've also seen the biggest financial dislocation since the Second World War.

"What is unique about the present set of circumstances is that both shocks have happened at the same time, and the combination has meant that life is extremely difficult, and will be for the UK economy over the next year."

However, he added that it is unlikely that the UK will be hit by a wave of repossessions and insolvencies over the coming months, as was the case with the last recession.