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By Fiona Shaikh and Matt Falloon
LONDON, Feb 6 (Reuters) - British factories endured the biggest slump in production in nearly 35 years at the end of last year, data showed on Friday, in a sign that Britain's slide into recession was even more dramatic than first thought.
The Office for National Statistics said industrial production fell 4.5 percent in the three months to December -- the biggest drop since 1974 when the government imposed a three-day working week because of energy shortages during the coal miners' strikes.
Production fell 1.7 percent on the month in December, leaving it 9.4 percent down on a year ago -- the largest annual decline since January 1981.
The ONS said, all other things being equal, those figures would shave its GDP estimate for the last three months of 2008 by 0.1 percentage points. The first reading showed a 1.5 percent decline in Q4 2008 -- the sharpest since 1980.
"The numbers are horrendously weak," said Malcolm Barr, chief UK economist at JP Morgan Chase.
Manufacturing output dropped 2.2 percent on the month and 5.1 percent on the quarter -- matching the record low set in the first quarter of 1974.
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Sterling fell against the dollar and the euro after the data as investors reinforced bets that the Bank of England will have to reduce interest rates still further from the current record low of one percent.
The BoE, as it chopped 50 basis points off borrowing costs on Thursday, said the world was in "the throes of a severe and synchronised downturn".
Expectations are growing that policymakers may need to resort to unconventional meeasures to revive the economy once interest rates near zero and there is also speculation that the government will have to take further supportive fiscal action.
The International Monetary Fund believes Britain will be the hardest hit of the leading G7 industrialised nations during the downturn, forecasting a 2.8 percent drop in GDP this year.
In further evidence of the severity of Britain's downturn, official insolvency figures on Friday showed just over 4,600 businesses were liquidated in England and Wales in the last three months of 2008 alone according to seasonally adjusted data -- 52 percent more than in the same period in 2007. The number of companies that went bust in 2008 was 15,535, the highest for any year since 1994.
The ONS data shows there is little sign yet that the weaker pound is boosting overseas demand for British-made goods.
"The real worry is that the various surveys suggest that things are set to get even worse over the coming months, with no signs at all that the drop in the exchange rate is yet boosting manufacturers' export order books," said Jonathan Loynes, chief European economist at Capital Economics.
The weaker pound may be having some impact on the costs British companies are paying for imported goods and materials, however, putting even more pressure on margins.
The ONS showed said producer price inflation was stronger than expected in January, although the annual rates are continuing to ease.
On the month, input prices jumped by 1.5 percent -- three times' analyst forecasts. The annual rate eased to 2.3 percent from 3.5 percent in December, the weakest since August 2007.
Output prices unexpectedly rose 0.1 percent on the month, while the annual rate cooled to 3.5 percent from 4.6 percent in December, the weakest since September 2007. (Editing by Stephen Nisbet)