The Bank of England cut the benchmark interest rate last week to 2 percent, the lowest level since 1951, as policy makers battled to prevent deflation from taking hold. Recessions in Britain and around the world have blunted manufacturers' ability to push through price increases as factory production shrinks.

"There's more of this to come, given the effects of the recession," said Alan Clarke, an economist at BNP Paribas in London. "Demand is hemorrhaging so it's very hard for manufacturers to raise prices. Deflation is highly possible."

Producer prices increased 5.1 percent on the year, the least since December 2007, the statistics office said. On the month, costs of petroleum products, food and other items fell, offsetting increases in seven other categories.

Weakening economic growth has made it harder for companies to offset costs by raising prices. RPC Group Plc, the UK maker of plastic containers for Nivea sun cream, on Nov 28 posted a first-half loss after rising polymer prices and energy costs squeezed margins.

Raw material costs dropped 3.3 percent, declining for a fifth month, the statistics office said. On the year, they increased 7.5 percent, less than half the rate in October and the slowest pace since September 2007.

Britain's inflation rate fell the most in at least 11 years in October to 4.5 percent. Bank of England Governor Mervyn King has refused to rule out the risk of deflation.

Gross domestic product dropped by 0.5 percent in the third quarter, the first decline in 16 years. The number of people claiming jobless benefits rose 36,500 to 980,900 in October, the most in 16 years.

Manufacturing, accounting for 14 percent of the economy, is suffering its longest streak of contraction since 1980. The Chartered Institute of Purchasing and Supply's factory index, based on a survey of about 700 companies, dropped to 34.4 in November, the weakest since the data began in 1992.

The slump in Britain's housing market is also deepening. Home values fell the most since 1992 in November, HBOS Plc said on Dec 4. Home repossessions by banks rose 12 percent in the third quarter as higher unemployment and a contraction in the economy left more Britons unable to pay their debts.

"We're probably going to see further cuts in interest rates, down to 1 percent by the end of the first quarter," said Paul Dales, an economist at Capital Economics Ltd in London. "Thereafter, the Monetary Policy Committee may go the whole hog and take them down to zero."