The governor of the Bank of England has warned that the UK is likely to sink into recession in 2009.

His comments to a business dinner in Leeds saw the pound fall to a five-year low against the dollar. He also revealed that UK banks were closer to collapse in recent weeks than at any point since the First World War.

But he added that the government's rescue package was likely to lead to see banks start lending to each other again and also hinted at further interest rate cuts in the next year.

"We are far from the end of the road back to stability, but the plan to recapitalise our banking system, both here and abroad, will I believe come to be seen as the moment in the banking crisis of the past year when we turned the corner," he said.

Meanwhile a separate survey by the National Institute of Economic and Social Research predicted that the UK economy would shrink by 0.9% in 2009 with business investment 3.8% lower than this year's level.