The Bank of England has made a shock one-and-a-half percentage point cut in UK interest rates to 3%, the lowest level since 1955.

The size of the cut - the most dramatic since 1981 - signals the Bank's concern the UK is heading for a long recession, the BBC's economics editor says.

Shadow chancellor George Osborne said: "This is a shot in the arm for the economy, but it shows how sick the patient is."

Traders on the London market were also concerned about the message the cut conveyed. As a result, the FTSE 100 share index closed down 5.6%, or 255 points at 4,275.7.

Equity markets slumped amid traders’ expectations that the weakness in the global economy would hit corporate profits.

The Bank of England said its dramatic move was a response to tightening credit conditions; the evidence of a “severe contraction” in the economy over coming months; and such a dramatic extinction of inflationary pressure that “at prevailing market interest rates, [there is] a substantial risk of undershooting the inflation target”.

Traders and economists took that final phrase to signify further rate cuts to come as the prevailing market interest rates already envisaged rates falling to 2.5 per cent. Market expectations are now for rates to fall below 2 per cent over the next year.