In another blow to the country, sterling dropped to its weakest level in 12 years on a trade-weighted basis, increasing the prospect of a recession in the UK.

After a month of bleak figures, the pound was headed for its worst monthly performance against the dollar since October 1992 after its ejection from the European Exchange Rate Mechanism.

On Thursday figures showed that UK house prices have fallen at their fastest pace since 1991 in August, while retail sales have dropped to their lowest level in 25 years.

This has raised expectations that the Bank of England would move to cut UK interest rates, possibly as early as next weeks policy meeting.

Gabriel de Kock at JPMorgan said, “Sterling remains under broad based pressure following further bad news from housing and retail.”

“The recent UK data has been universally bearish for the pound and the path of least resistance remains further weakness.”

The trade-weighted sterling slumped to 89.5 on Friday, its weakest level since October 1996. The pound also eased 0.2 percent to £0.8050 against the Euro, within touching distance of the record low of £0.8097 it hit in April after the Bank of England cut interest rates.

The pound, which has lost over 7 percent against the dollar so far this month, was little changed at $1.8300. However, this was not far from the two-year low of $1.8238 at hit on Thursday.

In the meantime, the dollar eased 0.2 per cent to $1.4727 against the euro.

House prices fell 1.9 percent in August, registering the biggest year on year falls recorded in the UK since 1991. Nationwide said the typical house price fell 1.9 percent in the month, taking the annual fall to 10.5 percent.

This is the first time a year on year decline in prices has entered double digits since the lender began collecting monthly data in 1991. The figures helped push sterling to a near record low against the euro as the outlook for the housing market continued to deteriorate.

Nationwide’s findings are in agreement with rival lender Halifax; showing prices fell nearly 11 percent in the year to July. This follows a week of bleak earnings reports from the UK housebuilding sector.

The speed of the decline in house prices has taken analysts by surprise, and contributed to the sluggish state of the market as buyers and sellers struggle to predict where prices will eventually settle.

Ian Stannard at BNP Paribas said: “We have been forecasting three quarters of negative growth in the UK, but we could now be looking at a full year. It wouldn’t take much more.”

Nationwide’s index shows house prices started falling last November, with the average price falling from a peak of £186,044 to £164,654 this month.

Nationwide’s chief economist, Fionnuala Earley, said that even if the Bank of England was to cut interest rates, to what extent this would “revive the mortgage and housing market is likely to be limited while overall confidence in economic and housing market conditions is low.”

The monetary policy committee has kept interest rates at 5 percent since April, and appears keen to keep its options open as it weighs the risks of recession against those of persistently high inflation.

However, markets have priced in a strong chance of a cut rate by the end of the year, and Ms Earley noted that this had started to bring down fixed mortgage rates.

Nationwide said more borrowers were now opting for long-term fixed rate deals, even though they had been more expensive than trackers. This suggests that people are nervous of being caught out by an unexpected rate rise, or by difficulties refinancing later.

The government has rejected businesses pleas to delay regulations that will allow around 4.5 million employees to request flexible working hours, meaning that employers have less than eight months to prepare for the change.

Under plans released by the Department For Business, parents with children up to the age of 16 would have the right to ask their employers for flexible working hours from April, 2009. At present this option is limited to those who have children up to the age of six.

The Department believes that businesses would have “sufficient time” to cope with the changes

The government’s decision will be seen as a victory for unions over employers, who accused the government of failing to understand the economic pressures companies face.

The CBI lobbied for the introduction of the new rights to be delayed until October 2009, while some employers’ groups suggested a 2010 implementation date.

David Frost, director general of the British Chambers of Commerce, said: “I just don’t think this sends out the right message. The government has to have an understanding of the climate that we’re in – let’s see how the labour market pans out over the next year and then look at it.”

David Yeandle, head of employment policy at the EEF manufacturers’ body, said: “The last thing we need at this stage in the economic cycle is to be adding more burdens on business.”

Ministers have attempted to soften the blow to businesses by offering to waive the requirement for employers to confirm in writing the agreements to let employees work part-time, a measure that officials estimate will save employers £28m a year.

Over a quarter of a million employees will change their working hours as a result of the new regulations, according to the government’s forecasts.

Almost 200,000 council workers in Scotland are staging a 24-hour walkout over a pay dispute, causing disruptions to local services such as schools, rubbish collection and ferry crossings. The council workers - members of the GMB, Unite and Unison unions – are due to take part in the strike after they rejected a 2.5 percent deal over the next three years.

Local government group Cosla, said that councils could not afford to increase the pay offer. Scottish ministers have urged both sides to resolve the dispute.

Industrial action will take place across the country; however the level of disruption differs in council areas. Many schools, libraries and day care centres will be closed, along with disruptions to school buses, school dinners and meals on wheels vans.

Caledonian MacBrayne, the ferry operator, said it would cancel sailings from Rothesay and Dunoon piers, due to action by Argyll and Bute council workers.

David Prentis, general secretary of Unison, which represents around 100,000 workers, said he hopes the public would understand the concerns.

He said: “Our members are taking this action very reluctantly. They care deeply about the vital services they provide and those who depend on them and we apologise for any disruption.

“However, members feel they have no choice when the employers’ offer is effectively a pay cut.”

Council headquarters will be picketed, and Union members will also distribute leaflets to commuters at Edinburgh’s Waverley Station, along with a rally that is due to start at 12.15 BST today (20/08/08) in Glasgow’s George Square.

Michael Cook, Cosla spokesman for the Scottish Employers, said councils were disappointed by the strike action, and had attempted to minimise disruption.

He said: “The issues are difficult and complex and need to be carefully thought through.

“However, as soon as possible, we will arrange talks with the trade unions in a bid to reach a settlement which takes account of the soaring cost of living which affects councils just as much as our workers.”

Finance Secretary John Swinney, said: “I would encourage both parties to try to resolve the dispute to ensure that there is no further interruption to public services and I hope that resolution can be achieved by local authorities and their employees.”

Mr Swinney’s comments came after unions last week called on the Scottish government to intervene and provide “adequate funding” to local authority employers to address low pay.

A second strike by government civil servants with the Public and Commercial Services (PCS) union was also due to take place on the same day, following a similar strike last month.

The dispute revolves around a 2 percent pay increase, which its members say amounts to a pay cut while inflation rises above 5 percent.

According to data produced by the Royal Institution of Chartered Surveyors (Rics), the supply of rental accommodation rose at the fastest rate on record in the three months to July, outstripping the increase in demand from tenants.

Rics’ latest survey showed that potential homebuyers had been forced to take rental accommodation because they were unable to obtain a mortgage. In the meantime, record numbers of homeowners are being forced to rent their properties because they cannot find a buyer.

“The wider housing market stagnation has compelled increasing numbers of would-be housebuyers and sellers to seek refuge in the rental market,” Rics said. “As a result, activity in the residential lettings market is booming.”

Rics say the increase in rental accommodation had not yet slowed growth in rental prices, which continue to rise at the same rate as in the previous quarter. However, oversupply was expected to have an impact on rents in coming months. The survey showed that a smaller proportion of surveyors expected rents to continue to rise over the next quarter.

“Established investors have been reaping the benefits of the housing downturn for some time and will continue to do so in the short term,” said James Scott-Lee, a Rics spokesman.

“However, ever-increasing supply could have an impact on rental growth as tenant options increase.”

The Rics survey showed that 37 percent more surveyors reported a rise in new tenant lettings that a fall in the three months to July, compared with 30 percent in the previous quarter. At the same time, 43 percent more surveyors reported a rise in the number of new lettings instructions than a fall, also up from 30 percent in April.

Rics said that rents in London had flattened out, while around the country they are on the rise. Just 3 percent more surveyors in London reported a rise in rents than a fall in the three months to July.

London estate agents have started to see rents come under pressure as competition between new landlord’s increases.

Estate agents including Savills and Knight Frank have reported sharp price falls for some rental accommodation, mostly in the prime areas of London.

“We feel rents have come down as supply has come through from the sales market,” said Jane Ingram, head of lettings at Savills. “It has been much more of a tenants’ market.”

She said that the reduction in rents had meant landlords were not obtaining the high yields that they had hoped for.

“Yields have edged up a bit but not as dramatically as people had expected,” she added.

Rics said that rising rents coupled with falling house prices had driven up gross rental yields for landlords in the three months to July, and meant that fewer than ever had opted to sell their properties in the three-month period.

Just 2.1 percent of landlords sold their properties at the expiry of the tenant lease, the lowest on record.

The economy will likely avoid a deep recession but will experience a mild one, with unemployment to rise by 250,000-300,000 to 2m over the next two to three years, along with a flat or slightly negative growth in gross domestic product over the next two to three quarters, the British Chambers of Commerce will announce today in its quarterly economic forecast.

However, the economy is likely to resume expansion after that, growth will be anaemic and weaker than it has been for some time, the BCC said.

Two other surveys showed that British businesses are preparing for an economic slowdown amid widespread expectations that business prospects for the coming year are dimming. A survey by the Institute of Chartered Accountants in England and Wales says confidence is now at its weakest point in all but two of 11 UK regions since the survey began in 2003.

The Lloyds TSB Corporate Markets Business Barometer shows that just 22 percent of companies believe their business will pick up over the next 12 months rather than languish. This marks a 10 percent fall from the reading in June and well below the average of 51 percent seen over the course of the survey’s six year history.

Robin Feith, the ICAEW’s executive director of operations and finance, said: “We expect the slowdown to be at its worst towards the end of 2008 and into early 2009 … Overall performance of UK plc through 2009 is likely to be the weakest growth since 1992 - when the economy grew by just 0.3 per cent.”

Mr Feith added that economic activity was likely to pick up towards the end of 2009, providing that wage inflation remained low.

Companies in the key services sector suffered the single biggest month on month drop in confidence, with only 27 percent of those surveyed expecting an increase of activity, according to the Lloyds TSB survey. Businesses in all regions covered suffered a declining balance, with the Midlands faring the worst.

The BCC expects the UK’s dominant services sector to fall sharply in 2008 and 2009. “Our view is that the threats to growth are more serious and more immediate than the risks of higher inflation,” it said.

The Office for National Statistics said on Thursday that overseas visitors to the UK have dropped by 5 percent on quarter, seasonally adjusted, in the three months to June, hitting the tourism industry, who are struggling with economic slowdown. In the year to June visitor numbers were 3 percent below the corresponding 2007 period.

The biggest drop has been in visits from North America, down 8 percent on an annual basis. However, that’s not surprising considering the slide in the dollar has cut Americans spending power abroad. But this is a blow to tour operators and retailers, since US visitors tend to be the biggest spenders.

Most alarming is the sudden drop in visitors from European countries – down 6 percent in the three months to June against the same period in 2007 – even though the currency’s strength ought to make the UK a more attractive destination.

Stephen Dowd, chief executive of UKinbound, the industry organisation blamed the drop in visitors on tightening the purse strings, “people in Europe are now starting to get worried about their own economies.” He said that long-haul tourism was also “struggling very badly”, but arrivals from France, Germany, Italy and Finland had all dropped in the last month or so.

However, there may be a silver lining for the tourism business in the UK, if British families choose to save money by holidaying at home this summer. But hotels and restaurants are the worst performers in the service sector, according to latest official data showing output contracted 1.2 percent quarter on quarter in the three months to May.

UKinbound’s latest monthly survey gives little hope of visitor numbers recovering over the peak summer season. It fund that forward bookings were nearly 10 percent lower that a year earlier in May, and 6.4 percent lower in June.

“Tour operators are having to sell at a discount, and if you add inflation into that it’s ridiculous,” Mr Dowd said.

The only area of which arrivals are still growing strongly is eastern and central Europe, largely due to people visiting relatives and friends who are now working in the UK.

The chancellor, Alistair Darling, Is under renewed pressure to clarify plans for the proposed stamp duty holiday after a poll of estate agents showed that uncertainty was hitting the housing market.

A National Association of Estate Agents survey found that 92 percent believed that the situation had increased consumer concerns, with people who would have bought a home now considering a delay in the hope of avoiding stamp duty later in the year. The NAEA survey polled 1,350 estate agents, and found that 62 percent had been asked for advice on whether to hold off until the pre-budget statement in the autumn,

Mr Darling has refused to rule out a change in stamp duty after it emerged that officials were considering policies including the temporary deferment of the tax for first time buyers.

“I understandably have been taking a plethora of concerned calls from members, some of whom are already starting to feel the impact this comment has had on ready-and-waiting purchasers,” said Peter Bolton King, chief executive of the NAEA, who believes it would be damaging if the Treasury waited to long to explain its plans.

The Treasury, to revive the housing market, is exploring several ideas as part of an “economic recovery plan”. These idea’s include a new ISA, to help first time buyers save for a deposit, and a scheme that helps homeowners who have lost their jobs pay their mortgages.

According to a report in Thursday’s Local Government Chronicle councils in Barnsley, Ports-mouth, Hartlepool, Essex and Kent have stated their interest in becoming mortgage lenders.

The councils are to lobby ministers for permission to lend to homebuyers for the first time in over a decade. The councils want the rules relaxed so they can borrow from banks in a similar way to housing associations. However, they still face the same problems that banks have become reluctant to lend to anyone in recent months.

“Councils would like the idea of being able to offer mortgages in this way but raising the money to actually do it would be the main issue,” said the Local Government Association.

Inflation reached 4.4 percent in July – the highest since the early 1990s and more than double the government’s target – as economists predict a further rise to 5 percent in the autumn. Rises in food prices, fuel costs and disappointing price cuts in the summer sales, have caused this latest jump, which marks the fourth monthly increase in the consumer price index.

In the Bank of England’s last quarterly forecast in May, it gave less than 10 percent probability that inflation would be as high as it is now. The bank will set out its latest forecasts for the economy and inflation on Wednesday.

Several economists expect that the Bank might even be forced to raise rates to bolster its diminishing reputation for keeping to close to target. Very few economists expect rate cuts this year.

The Bank’s forecasts on Wednesday will show that, apart from two brief interludes, it expects inflation to be too high for the five-year stretch between the summers of 2005 and 2010. High inflation in July was also feed further rises next January when regulated train fairs raise by at least 6 percent, 1 percent more than the 5 percent rise in the retail prices index last month.

Economists say the figures were shocking because they were worse than those in other countries, and were not limited to food and petrol price rises and did not yet include announced rises in gas and electricity prices. Relief will come, however, from falling oil and grain prices in the coming months, but this will take quite some time to work into lower consumer price inflation.

Vincent Cable, the Liberal Democrat Treasury spokesman, said: “It’s very clear that we’re in for a dose of stagflation, with the economy slowing abruptly and inflation too high and increasing.”

A report from the Royal Institution of Chartered Surveyors (RICS) suggests that house prices have further to fall, but there are tentative signs that the slide in housing transactions are starting to level out.

Its monthly survey shows market conditions are still slackening, with surveyors reporting a further drop in new instructions and new buyer numbers, and reduced numbers of completed sales.

Considered as one of the best guides to the direction of house prices, the ratio of completed sales to stocks of unsold property fell again from 18.2 percent in May to 17 percent in June, which is the lowest level since 1995.

Furthermore, with price indices by main lenders showing double-digit year-on-year declines few in the industry hold out hope for any rapid improvement. RICS said a net balance of 83.9 percent of surveyors thought house prices had fallen in the past three months, while a balance of 68 percent expected further declines.

Estate agents however are less worried about the outlook for prices than they are about the near-freeze in activity. First time buyers are struggling to get a foot on the property ladder due to tight credit conditions, while others are avoiding buying in a falling market.

Bank of England data shows that mortgage rates on popular fixed-rate mortgage products have edged down, partly because of a fall in swap rates determining leaders’ funding costs.

For a borrower with a 25 percent deposit, the average rate quoted for a two-year fixed rate mortgage fell from 6.6 percent in June to 3.6 percent in July.

However, Simon Hayes, an economist at Barclays Capital, said lower rates were balanced by more stringent credit checks and non-price criteria. “They would probably have little effect on mortgage activity, which had been much weaker in recent months than the level of rates would justify,” he said.

Michael Saunders, economist at Citi, noted rates for unsecured loans had risen, giving an “overall picture … of poor credit availability and tightening lending standards”.