In his pre-budget report Alistair Darling has said that the economy will contract by 4.75% in 2009 compared with his Budget estimate in April of 3.5%.

However, he insisted that the economy would start growing by the end of the year and next year would grow by between 1% and 1.5%. He also warned that further support from the government was needed while the recovery remained fragile.

The chancellor also said that the public finances were deeper in the red, with a deficit of £178bn this year compared with the £175bn he had predicted.

"Recent market reaction to financial problems in Dubai highlights just how fragile world confidence remains. So while I am confident that the UK economy is on the road to recovery, we can't be complacent," said Darling.