The Governor of the Bank of England has given his most downbeat assessment yet of Britain’s economy by admitted that Britain is heading into a recession.

Speaking at a conference in Leeds, Bank of England Governor Mervyn King admitted that the combination of a stagnant credit market and rising costs of living meant that the UK was at risk of a “sharp and prolonged” economic slowdown and that the UK is now “entering a recession.”

Those economic fears sent the pound plummeting to a five year low against the US Dollar, now trading at $1.63.

In a statement to a host of business leaders, Mr King said: "Taken together, the combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand. Indeed, it now seems likely that the UK economy is entering a recession."

King also warned that the recovery from any recession may be longer than first anticipated, given the dependency that the UK economy has on financial markets.

"For several years, the UK banking sector has been relying extensively on external capital flows, principally short-term wholesale funding, to finance its lending activities. Those external inflows have fallen sharply – a mild form of the reversal of capital inflows experienced by a number of emerging market economies in the 1990s," he said.

"Unless they are replaced by other forms of external finance, the adjustments in the trade deficit and exchange rate will need to be larger and faster than would otherwise have occurred, implying a larger rise in domestic saving and weaker domestic spending in the short run."