(Corrects currency conversion in eighth paragraph.)

Oct. 23 (Bloomberg) -- Prime Minister Gordon Brown suffered a political setback as government figures today unexpectedly showed the economy extended its longest recession since records began in 1955.

With less than eight months before he has to hold the next general election, Brown is counting on an economic revival to boost his Labour Party and erase the advantage in opinion polls the Conservatives have enjoyed for almost two years.

“The problem for the government is that it starts closing off their options for an election narrative,” said Andrew Hawkins chief executive of ComRes Ltd., a polling company. “They had expected to be able to say they had delivered a decade of economic growth and the recession was the fault of greedy American bankers. The more countries that emerge from recession before us, the more embarrassing it becomes.”

Gross domestic product dropped 0.4 percent in the third quarter, dashing expectations that Britain would join France, Germany and Japan in exiting recession. Economists predicted a 0.2 percent increase, according to a Bloomberg News survey. The pound fell the most in a month against the euro.

Chancellor of the Exchequer Alistair Darling stood by his forecast that the U.K. economy will start growing again this year, saying it would be “madness” to start withdrawing fiscal and monetary stimulus now, as proposed by the Conservatives.

“I have always been clear that growth will return at the end of the year, as my budget forecasts assumed,” he said in a statement released by the Treasury in London.

Seeking Credit

Brown has sought to earn credit with voters for preventing a depression after the government rescued Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc and cut value-added taxes to support consumer spending.

In total, Brown has pledged as much as 1.4 trillion pounds ($2.3 trillion) of public money to cover potential losses in the financial system.

“We now know that Gordon Brown’s recession plan has not worked, and this news has destroyed Labour’s claim that Britain was better placed than other countries to weather the storms,” said George Osborne, who speaks on Treasury affairs for the Conservatives.

“These worse-than-expected figures should head off the growing signs of complacency, the economy is still extremely fragile,” Brendan Barber, general secretary of the Trades Union Congress, said in a statement. “Any halt in economic stimulus, or even worse, cuts in spending in a premature effort to close the deficit, could easily send us into another downwards spiral.”

France, Germany, Japan

Central banks in Canada and Italy both estimate that slumps in their economies ended in the third quarter, and the U.S. probably also returned to growth, according to the median forecast of economists in a Bloomberg News survey. France, Germany and Japan exited their recessions in the second quarter.

The Treasury said in April the budget deficit would reach 12.4 percent of GDP in the year through March 2010, the most since World War II, and analysts say borrowing may turn out to be even higher.

Standard & Poor’s said in May that Britain may lose its AAA credit rating after predicting debt may reach 100 percent of GDP by 2013, more than the 79 percent forecast by the Treasury.

“The U.K. remains exposed to very high levels of debt and dependence on financial services so we are even expecting a small contraction in growth next year,” said Fathom Financial Consulting director Danny Gabay, who was alone in forecasting a 0.1 percent contraction in the second quarter. “Brown will need more robust growth and falling unemployment to benefit in the election and that doesn’t look like it’s going to happen.”

The pound dropped 1.2 percent to $1.6421, the biggest decline since Oct. 9. It also fell 1.2 percent versus the euro, to 91.29 pence, its sharpest slide since Sept. 24.

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net.

Last Updated: October 23, 2009 11:08 EDT