The pound tumbled to a record low against the euro on the foreign exchange markets yesterday as traders speculated that the Bank of England will have to keep cutting base rates to fend off a painful economic downturn.

The pound tumbled to a record low against the euro for a fourth consecutive session on the foreign exchange markets yesterday as traders speculated that the Bank of England will have to keep cutting base rates to fend off a painful economic downturn created by the US sub-prime mortgage fiasco and global credit squeeze.

Sterling gave up more ground against the euro and a number of other currencies including the dollar after industry reports this week showed a fall in house prices and slumping consumer confidence.

The Swiss-based investment bank UBS revised its interest rate forecast for the UK, predicting four more reductions this year.

Members of the Bank's Monetary Policy Committee, led by Governor Mervyn King, shaved a quarter-point off the cost of borrowing on Thursday - the third cut since December. UK base rates now stand at 5%.

The Old Lady of Threadneedle Street "emphasised its well-known dilemma of high inflation expectations on the one hand against the risk of a nasty downside shock to economic growth on the other," Meyrick Chapman, a fixed-income strategist at UBS in London, wrote in a note to clients.

King has dubbed this year the toughest challenge since the bank won independence to set interest rates in 1997, as inflation picks up but growth slows as the global credit crunch bites.

The European Central Bank, meanwhile, kept its main rate at 4% - a six-year high. ECB president Jean-Claude Trichet cited "a rather protracted period of temporarily high" inflation as the reason for keeping European rates unchanged.

A Reuters poll showed 36 of 56 economists anticipate the Bank of England will trim rates again by June.

Only a few weeks ago a rate cut in April had seemed an outside bet, but market sentiment has changed swiftly. The public mood has also darkened due to heightened fears of a recession in the United States and a worldwide economic downturn.

Many prominent UK investors are highly pessimistic about the outlook.

"This is as tough as I've known it," said Philip Green, owner of Bhs and Arcadia group and one of the UK's most successful retailers, describing the economic climate as "ugly".

Credit market turmoil has made banks reluctant to lend, meaning little, if any, of the two UK rate cuts since December has been passed on to consumers and businesses.

Two of the UK's top mortgage lenders - Nationwide and Alliance & Leicester - actually raised their interest rates for the second time in days on Thursday.

"The medicine may not get through to the patient," said Andrew Smith, chief economist at KPMG. "Even if money market rates fall in tandem, which is questionable, the cut may not be reflected in mortgage and commercial loan rates."

He added: "With the impact of monetary policy now blunted, rates will ultimately have to fall further to achieve the same result."

Many City economists warned that the pound could fall further in coming days.

"The UK economy is clearly slowing and the pound is going to remain at low levels against the euro," said Paul Robinson, currency strategist at Barclays.

Phyllis Papadavid, currency strategist at French bank Société Générale, predicted sterling could face more turbulence. "The pound will come under continued pressure from tighter credit conditions and the prospect of weaker growth," she said.

Sterling dropped to 80.33p per euro, the lowest level since the common currency's inception in January 1999. It later recovered slightly to close around 80.27p per euro compared with 79.87p on Thursday. Currency dealers said sterling lost nearly 2% against the euro this week and 9% this year.

Credit Suisse said there is a 40% chance the Bank of England will reduce its main rate another quarter-point at next month's meeting, basing its forecast on an index based on overnight swap rates. There is a 2% chance of an equivalent cut by the ECB, a separate survey showed.

The dollar also fell against the euro, and gold closed lower in London dealing.

Elsewhere in the financial markets, gilts - UK Government bonds - rose after General Electric, the big US manufacturer and financial services firm, said first-quarter profit fell 12%, stoking appetite for the safety of government debt.