(Adds details, background)
* Q3 GDP confirmed at -0.5 pct, biggest fall since Q4 1990
* Household spending -0.2 pct, sharpest fall since 1995
* Government spending +1.0 percent qtr/qtr
By Fiona Shaikh and Matt Falloon
LONDON, Nov 26 (Reuters) - Britain's economy shrank at its fastest rate since 1990 in the third quarter of this year as household spending fell by its biggest amount in more than a decade, official data showed on Wednesday.
The Office for National Statistics confirmed the economy contracted by 0.5 percent in the July-September period compared with the previous quarter, leaving the annual rate of growth at 0.3 percent, the weakest since 1992.
The figures showed the consumer sector and manufacturing suffered more than previously thought and that government spending was just about the only thing supporting the economy in the third quarter.
The data reinforced concerns that Britain is sliding into a deep recession and raised expectations the Bank of England will follow this month's 1.5 percentage point cut in borrowing costs with another sharp reduction next week.
BoE Governor Mervyn King told a parliamentary committee this week that policymakers would do whatever it takes to steer the economy back into calmer waters.
"There is nothing here to suggest that the economy is not going to carry on contracting for a prolonged period," said Jonathan Loynes, chief European economist at Capital Economics.
"We continue to expect GDP to fall by around 1.5 percent next year and by another 1 percent or so in 2010."
Finance minister Darling said in his pre-budget report this week he expects the economy to contract by 0.75-1.25 percent next year.
SPENDING SLUMP
Britain's services sector, which accounts for nearly three-quarters of economic output, shrank by 0.4 percent in the third quarter, the sharpest decline since 1990, when Britain was last in recession.
Within that, the distribution, hotels and catering sector -- which includes retailers -- contracted by a downwardly revised 1.9 percent, its steepest fall since the deep downturn of 1980.
Sharp declines in sales of motor vehicles and household goods depressed the household spending component for the second quarter in a row, by 0.2 percent. That was the biggest decline since Q1 1995 and marked the longest stretch of falls since 1992.
Consumers have dramatically cut back on spending as rising living costs and tight credit have weighed on household budgets, while massive job cuts in most sectors means there is little chance of a bounce-back anytime soon.
Many of Britain's top retailers have slashed prices in recent weeks to lure in shoppers, but some have suffered more than others in the current gloomy climate.
Woolworths, the low-cost general goods store that has been a stalwart of the British high street for nearly a century, is teetering on the brink of collapse and other stores have warned that sales and profits are likely to dive.
Britain's government announced a 20 billion pound ($30.75 billion) fiscal stimulus package on Monday, which it hopes will put more money in people's pockets and prevent the prolonged downturn that many economists predict.
And Wednesday's figures showed government spending rose by 1.0 percent in the third quarter and was 2.7 percent higher than a year ago.
The ONS revised down its estimate of manufacturing output, however, to show a decline of 1.3 percent on the quarter, the weakest since Q4, 2001.
"We expect the Bank of England to cut interest rates sharply further next week as it tries to limit the length and depth of the recession," said Howard Archer, Chief European and UK economist at IHS Global Insight, adding that a half-point cut to 2.5 percent should be the minimum it delivers. (Editing by Mike Peacock/Toby Chopra)