(Adds finance minister comment)
By Anna Ringstrom and Niklas Pollard
STOCKHOLM, Feb 11 (Reuters) - Sweden's central bank cut its key interest rate by a full percentage point on Wednesday to a record low of 1.0 percent and said it could not rule out rates at zero given that the economy has worsened sharply.
The repo rate is now at its lowest level since its introduction in 1994 and marks the lowest official Swedish interest rate since records began in 1907. The previous trough was 1.50 percent, reached in 2005.
A Reuters poll last week showed most economists had expected a 50 or 75 basis point cut.
The Riksbank, which in December forecast rates would stay near 2.00 percent for a year, now forecast rates at an average of 0.8 percent in the first quarter of 2010, implying a further easing of monetary policy.
The Swedish crown
"Interest rates can't fall lower than to zero and that is a scenario that can't be ruled out," Riksbank Governor Stefan Ingves told a news conference.
Sweden's export-dependent economy slid into recession in the third quarter of 2008 and figures for the fourth quarter have been dire. On Tuesday, industrial production statistics showed December's output had fallen by a fifth from a year earlier.
"The downturn in the economy now looks as if it will be even worse than was thought in December," the Riksbank said in a statement, adding economic recovery would not begin until 2010.
"A lower repo rate and repo rate path are needed to counteract production and employment being too weak and inflation becoming too low ... The interest rate may need to be cut slightly more over the coming six months," it said.
Commenting on the rate cut, Finance Minister Borg told reporters: "Industrial production is falling 20 percent. Parts of Swedish industry are almost at a standstill."
"We need everything that can cushion this downturn. In that respect one has to describe this as a national emergency."
The Swedish crown
"This was a bit bigger (cut) than expected, but at the same time not totally surprising. They are signalling a further 25 basis point cut which will probably come in April," said Peter Kaplan, analyst at RBS.
"The market will however speculate on an even bigger cut than that."
CLOSE TO ZERO
The Riksbank's discount rate fell as low as 2.5 percent in the 1930s and in the 1940s. Its marginal rate, used from 1987 to 1994, never fell that low.
"It was a bigger cut than we had expected," said Michael Grahn at Danske Bank. "As far as I can judge this, it is moving towards a 'close to zero' policy."
Plunging demand worldwide has sent many of Sweden's heavyweight export firms scrambling to cut production and jobs.
Industrial output in the Nordic country, home to the likes
of world number two truck maker Volvo
Most economists now forecast the Nordic region's biggest economy will contract by as much as 2 percent this year.
The Riksbank cut its growth outlook, saying it now expected the economy to shrink 1.6 percent from a previous forecast of a 0.5 percent decline.
The Labour board said separately that the jobless rate rose to 4.5 percent in January from 4.0 percent in December. It said the number of people given notice was the highest on record for that month of the year.
"We expect (the central bank) to land at 0.5 percent at their next rate announcement (in April)," Nordea analyst Annika Winsth said.
Sweden's inflation rate slowed substantially more than expected in December, to 0.9 percent, raising the until recently unthinkable spectre of deflation in the Nordic country.
The central bank said it expected consumer prices to fall 0.5 percent this year before rising by 1.6 percent in 2010. (Additional reporting by Stockholm newsroom, editing by Mike Peacock/Ruth Pitchford)