Dec. 1 (Bloomberg) -- U.K. manufacturing shrank at the fastest pace in at least 16 years in November and house prices fell to the lowest since 2006, putting the Bank of England under renewed pressure to slash interest rates this week.

The Chartered Institute of Purchasing and Supply’s factory index, based on a survey of about 700 companies, dropped to 34.4, the weakest since the data began in 1992. The average cost of a home in England and Wales fell 8.1 percent in the past year to 161,400 pounds ($248,000), the lowest since January 2006, Hometrack Ltd. said.

The pound declined after the reports on expectations the Bank of England will cut the benchmark interest rate by a full point on Dec. 4 from five-decade low of 3 percent as policy makers seek to stop the recession from deepening. Chancellor of the Exchequer Alistair Darling said yesterday he may need to take additional steps to combat the slump.

“Alarm bells are being set off at the Bank of England,” said James Knightley, an economist at ING Financial Markets in London. “There’s plenty of room for them to cut interest rates further. It’s even conceivable we get down to zero rates next year.”

The pound fell 0.6 percent against the dollar after the release of the manufacturing data. It traded at $1.5073 as of 10:29 a.m. in London. Against the euro, it dropped 0.7 percent and traded at 83.93 pence per euro.

Manufacturing, accounting for 14 percent of the economy, is suffering its longest streak of contraction since 1980. The result for November was below October’s revised 40.7 and the 39.7 median forecast in a Bloomberg News survey of 33 economists.

Global Slump

Industry is slumping around the world. Euro region manufacturing contracted by the most on record in November with an index produced by Markit Economics falling to 35.6 from 41.1 in October. That was the lowest since the survey began in 1998 and below an initial estimate of 36.2 published on Nov. 21.

Manufacturing in the U.S. probably shrank in November at the fastest pace in 26 years, economists said before a report today. The Institute for Supply Management’s factory index dropped to 37 last month, the lowest level since 1982, from 38.9 in October, according to the median estimate in a Bloomberg News survey. That report is due at 10 a.m. New York time.

Today’s U.K. data showed a gauge of new orders fell to 29.7 from 37, while measures showing prices paid by companies for raw materials and the prices they charge customers both plunged.

Jaguar and Land Rover, the U.K. automakers owned by India’s Tata Motor Ltd., announced plans on Nov. 27 to cut jobs as the global recession undermines demand for new cars.

‘Pretty Weak’

“Manufacturing is going to stay pretty weak for at least another six to 12 months,” said Nick Bate, an economist at Merrill Lynch & Co. in London and a former U.K. Treasury official. “The economy is going to contract through late 2009, and further Bank of England rate cuts are in store.”

Still, factories may benefit from weaker commodity prices and the drop in the pound. Oil costs have fallen by about two- thirds this year. The pound has dropped about 25 percent against the dollar after reaching a record high above $2.11 last year.

The U.K. economy may contract by 1.1 percent next year, the most since 1991, the Organization for Economic Cooperation and Development said Nov. 25.

The Treasury may need to add to the tax cuts and spending boosts announced in the Nov. 24 pre-Budget report, Darling said in an interview with the U.K.’s Observer newspaper yesterday. He said the government may also announce new plans to force banks to start lending again in the Queen’s speech on Dec. 3.

U.K. mortgage approvals matched the lowest since at least 1999 in October as lenders granted 32,000 loans for house purchase, down from 33,000 in September, the Bank of England said today. House values declined 1.1 percent on the month, compared with a 1.3 percent drop in October, Hometrack said.

The Bank of England will lower the benchmark interest rate by at least half a percentage point at its meeting on Dec. 4, according to all 60 economists in a Bloomberg News survey. The median forecast is for a 100 basis-point reduction after the central bank last month reduced its key rate by 1.5 percentage points, the biggest cut in 16 years.

To contact the reporters on this story: Jennifer Ryan in London at ryan13@bloomberg.net; Simon Kennedy in London at skennedy4@bloomberg.net.

Last Updated: December 1, 2008 05:46 EST