The value of the pound has plunged, suffering its sharpest drop in 16 years, after the Governor of the Bank of England warned that Britain is entering a recession.

 

Traders in the US and Japan rushed to dump their holdings of sterling, electing to cut their losses as forecasts suggest the British economy is poised to deteriorate further. The FTSE 100 opened down 1.5 per cent.

The pound slumped more than six cents against the dollar to $1.621 - the biggest one-day drop since "Black Wednesday" in September 1992, when Britain was forced to withdraw from the European Exchange Rate Mechanism. Sterling also fell sharply against the euro and was down almost 1p at 79p in early trading in London.

The currency's fall spells bad news for British consumers, with imported goods set to become more expensive. Holidaymakers will be given less favourable rates when exchanging their pounds.

Analysts have predicted there is worse to come. Ian Stannard, a currency analyst at BNP Paribas, said: "It's the first time that Mervyn King has talked about recession. Now the market now knows that the Bank of England will have to cut interest rates aggressively ... We'll see sterling head down to $1.60".

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