Nov. 5 (Bloomberg) -- U.K. factory production dropped, extending the worst streak since the early years of Margaret Thatcher's administration, and services contracted the most since 1996 as the economy approached a recession.

Production fell 0.8 percent in September from August, the biggest drop in 19 months, the Office for National Statistics said in London. Output last fell for seven straight months in the recession of 1980. The Chartered Institute of Purchasing and Supply's index of services dropped to 42.4, the lowest in its 12-year history, from 46 in September.

Britain is headed for its first recession since 1991 as the global financial crisis spreads from banks to the rest of the economy. Bank of England policy makers will lower the benchmark interest rate by at least half a percentage point to 4.5 percent after tomorrow's decision, economists say.

``Today's data were terrible,'' said George Buckley, an economist at Deutsche Bank AG in London. ``This raises the risk the Bank of England moves by more than the 50 basis points we expect.''

The pound fell as much as 0.3 percent after the reports and traded at $1.5812 as of 10:09 a.m. in London. The U.K. currency has declined more than 20 percent against the dollar this year.

A CIPS sub-index for employment in services fell to the lowest since the survey began. A gauge of expectations declined to 50.8, also a record low, from 58.2 in September. Markit bases its finding on a survey of about 700 companies.

Adecco SA, the world's largest supplier of temporary workers, yesterday pointed to the U.K. slump as it reported a 27 percent drop in third-quarter profit.

Contracts

The U.K. economy contracted for the first time since 1992 in the third quarter, shrinking 0.5 percent, and today's reports add to evidence that the outlook is worsening. The CIPS manufacturing index stayed near a 16-year low and construction industries shrank at the fastest pace in more than a decade.

``The slump in service sector business activity in October points to a more acute contraction in the economy in the fourth quarter,'' said Ross Walker, an economist at Royal Bank of Scotland Group Plc. The ``collapse'' in the index ``increases the chances of the Monetary Policy Committee delivering a Bank Rate cut in excess of 50 basis points.''

Factory production dropped 2.3 percent from a year earlier, the statistics office said. In the third quarter, output fell 1.3 percent from the previous three months, the largest decline since the fourth quarter of 2001.

The Bank of England will probably respond by cutting its main rate, which is still the highest among the Group of Seven nations. The U.K. central bank will lower the benchmark interest rate to 4 percent from the current 4.5 percent tomorrow, according to the median of 60 economists' estimates in a Bloomberg News survey.

More than 10 predict an even larger cut, which would be the biggest reduction in a single stroke since the Bank of England won the power to set interest rates independently in 1997.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Svenja O'Donnell in London at sodonnell@bloomberg.net.

Last Updated: November 5, 2008 05:35 EST