The pound yesterday plunged to a two-year low against the dollar, and Charles Bean, deputy governor of the Bank of England, piled on more gloom.

The pound yesterday plunged to a two-year low against the dollar, and Charles Bean, deputy governor of the Bank of England, piled on more gloom with the warning that the global economic slowdown would likely "drag on for some considerable time".

At the same time, he remained sanguine that the UK economy would return to growth next year.

While analysts said sterling's heavy recent slide should not serve an obstacle to the Bank of England cutting rates, Bean's remarks - made at the annual conference of the world's top central bankers in Jackson Hole, Wyoming - came against the background of growing economic malaise in the UK and record lows for the British currency.

One pound yesterday bought $1.8407 amid the hangover of Friday's gloomy data.

However, sterling rallied slightly later in the day to $1.8582, as the dollar lost ground to rising oil. One euro yesterday afternoon bought 79.64p compared with 79.82p at the previous close.

Meanwhile, the global economic upheaval, which started a year ago with the US sub-prime mortgage crisis, the subsequent housing slump and credit crunch on both sides of the Atlantic, has spread throughout the wider economy, and is now threatening to throw the entire industrialised world into recession.

Bean said: "Last year, this was a financial crisis that we thought with a bit of luck would be over by the time of Christmas, but it has dragged on for a year and looks like it will drag on for some considerable time yet."

He said he believed that he and his fellow members of Monetary Policy Committee (MPC) were now facing the biggest financial challenge of the last 40 years.

"It's fair to say that if you look at the shocks impinging upon us, this is at least as challenging a time as back in the 1970s," Bean said.

"Some people have said it's as big a financial shock as the Great Depression and as far as the oil shock goes, the rise in oil prices is in the same order of magnitude that we had to deal in the 1970s."

Meanwhile, oil yesterday closed above $115 a barrel as the US dollar lost some ground against the euro and the Japanese yen.

So far, the credit crunch has cost thousands of jobs in the financial services industry and prompted bail-outs for mortgage lender Northern Rock and US investment bank Bear Stearns.

Bean said such volatility had left central bankers in a cautious mood.

At the same time, the Danish central bank yesterday said it has taken over the country's tenth-largest bank after it was hit by the sub-prime housing crisis.

Roskilde Bank will receive 4.5 billion kroner (£480.8m) in cash from Nationalbanken and the financial sector in Denmark because the listed bank failed to find a buyer to take it over.

Nationalbanken also said it would assume 37.3 billion kroner of debt.

Bean said: "There are periods when markets look like they are getting better. Then another grenade explodes, another bout of fear for the sustainability of some financial institutions, maybe intervention by the authorities.

"It has been very much ebb and flow and the mood here is very much one of financial caution as regards the next year. We have our fingers crossed but there is the recognition there is still quite a long way to go yet."

Meanwhile, the chances of a rate cut were heightened at the end of last week when the latest growth data showed the British economy had ground to a halt in the second quarter of the year - its worst quarterly performance since the second quarter of 1992, highlighting the growing risk of a UK recession.

However, sterling's slippage should not stop the MPC cutting rates in an effort to kick-start the economy this autumn, economic forecasters at Big Four accounting firm Ernst & Young said yesterday.

The MPC has kept rates at 5% since April, torn between the need to tame inflation, which has risen to more than double the target level of 2%, and its desire to revive the flagging housing market and wider economy by easing the cost of borrowing.

One potential consequence of cutting rates would be to weaken further the value of the pound, which has fallen more than 7% against the dollar since mid-July to hit its lowest point for two years.

Most analysts agree that the fall against the dollar should be judged alongside the fact that it had steadied against the euro, and against a recent fall in the price of oil and other commodities.

The deteriorating outlook for the economies of east Asia would reduce the demand for UK exports.

Earlier this month, the European Union reported that the eurozone economy shrank 0.2% in the second quarter, also raising recession fears as Germany, France and Italy braked sharply with high fuel and food prices holding back consumer spending.

Nonetheless, Bean remained hopeful that there will be a return to growth next year.

"On the assumption commodity prices remain stable and if anything fall back, then inflation should drop back as we go through next year," he said.

"One would hope that the conditions in credit markets should gradually start to improve and those two factors will help to ensure growth will start to pick up as we go through next year.

"It's going to be a tricky period. Household real income is very low. That will make it difficult for households and there are difficult social issues that will arise."

He added: "The important thing is people realise this is just a transitory period of subdued growth and we will get through the other side and growth will resume to more normal levels.

"Hopefully, we can go back to something like the steady growth that we experienced over the past decade."

In the US yesterday, against a background of the recent decline in oil prices and easing of inflationary pressures, debate among the Federal Reserve's policymakers at the Jackson Hole mountain resort over whether to raise interest rates to avoid higher inflation in the future continued to rage - with many critical of what the US central bank has done so far.

Nonetheless, Fed chairman Ben Bernanke told the annual economic symposium that "the "financial storm" in the US had "not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment".

Bernanke also agreed that the inflation outlook remained uncertain, but would probably moderate later this year.

While the Fed can try to contain inflation by raising interest rates - which could also support the dollar by making American investments more attractive - growing unemployment and concerns about economic growth may stop the central bank from doing so.