The Bank of England slashed its forecast for UK economic growth next year to about 1.0 percent on Wednesday, owing to the sovereign debt crisis in key trading partner the eurozone.
Britain's gross domestic product (GDP) was predicted to average about 1.0 percent in 2013, down from the central bank's previous forecast of around 2.0 percent, according to a fan chart in the central bank's latest quarterly report.
In reaction, sterling sank to $1.5855 -- which was its lowest level since September 5. It also hit a near two-week trough against the euro.
"The future path of GDP will depend critically on developments in the global environment, with strains in the euro area posing the greatest risk to a sustained recovery," the Bank of England (BoE) said in the report.
"The outlook for UK growth remains uncertain. A major threat to a sustained recovery is if the adjustments in indebtedness and competitiveness required within the euro area occur in a disorderly manner."
The BoE added: "The economy is likely to see a sustained, but slow, recovery over the next three years... Output is more likely than not to remain below its pre-crisis level until towards the end of the forecast period."
Recent data showed that the economy rebounded by 1.0 percent in the third quarter of 2012, or three months to September, bouncing back from its longest double-dip recession since the 1950s.
Growth turned positive on one-off factors, including the London 2012 Olympic Games and rebounding activity after an extra public holiday for Queen Elizabeth II's Diamond Jubilee in the second quarter.
"GDP is estimated to have increased by 1.0 percent in Q3, although that strength was exaggerated by temporary factors," the BoE said Wednesday.
"Headline growth is consequently likely to fall back sharply in Q4," it warned.
The BoE also forecast that consumer prices index (CPI) annual inflation would fall back towards the government's 2.0-percent target in the second half of 2013, later than previously thought.
Official data showed Tuesday that inflation surged to a higher-than-expected rate of 2.7 percent in October largely owing to massive hikes in university tuition fees.
In slightly better news on Wednesday, official data showed the unemployment rate had dipped to 7.8 percent in the quarter to the end of September.
Britain sank into the first phase of a double dip recession in 2008 as a result of the devastating global financial crisis that sparked a number of vast banking bailouts.
Output rebounded in late 2009 but struggled to stage a convincing recovery and fell back into a second downturn in late 2011 as output was hit by the troubling eurozone crisis.
The economy has been hit hard also by deficit-slashing austerity from its coalition government.
The BoE has sought to aid the recovery by slashing its key interest rate to a record low of 0.50 percent, where it has stood since March 2009, when it also launched its radical quantitative easing (QE) stimulus policy.
Last week, the bank's monetary policy committee decided to pause its QE programme at �375 billion after Britain escaped from recession, sparking speculation that the policy was scrapped.
But King added on Wednesday: "The committee has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases."
Under QE, the BoE creates cash that is used to purchase assets such as government and corporate bonds with the aim of boosting lending by retail banks and in turn economic activity.
Parts for Vauxhall and Opel Astra cars are transported on the production line at the Vauxhall factory in Ellesmere Port, north-west England. The Bank of England on Wednesday cut its forecast for UK economic growth next year to about 1% owing to the sovereign debt crisis in the neighbouring eurozone.
Bank of England Governor Mervyn King attends the Lord Mayor's dinner to the Bankers and Merchants of the City of London at Mansion House in London, 2011. The Bank of England slashed its forecast for economic growth next year to about 1.0 percent on Wednesday, owing to the sovereign debt crisis in key trading partner the eurozone.