British industrial production fell more sharply than expected in December and at its fastest quarterly rate since 1974, suggesting the economy shrank even more sharply at the end of last year than first thought.

The Office for National Statistics said yesterday that industrial production, which makes up 18 per cent of gross domestic product, shrank by 1.7 per cent in December, taking the annual rate down to -9.4 per cent - the weakest since January 1981.

On the quarter, output was down 4.5 per cent, the sharpest contraction since first quarter of 1974, when energy shortages resulting from coal miners' strikes in Britain forced the government to impose a three-day working week.

The ONS said that all things being equal, December's figures would take 0.1 percentage points off the fourth quarter GDP. The preliminary estimate for GDP for the last three months of last year showed a contraction of 1.5 per cent, which was the biggest drop since 1980.

Manufacturing output fell 2.2 per cent on the month, taking the annual rate down to -10.2 per cent, the weakest since March 1981. The quarterly rate of -5.1 per cent was the weakest since Q1 1974.

"The end of the year was a dire period for the manufacturing sector," said Brian Hilliard, economist at Société Genéralé. "The best we can hope for is a stabilisation in the year-on-year rate at a deeply negative number."

The pound fell against the dollar and euro as investors bet the Bank of England would have to cut interest rates further from the current record low of one per cent and may even have to take unconventional action to support the economy. Separate figures from the ONS showed producer prices were stronger than expected in January, although the annual rates of inflation are continuing to ease.

Annual output price inflation eased to 3.5 per cent from 4.6 per cent in December, the weakest since September 2007.

Input price inflation eased to 2.3 per cent on the year from 3.5 per cent in December, the weakest since August 2007.