The UK's gross domestic product (GDP) was flat in the three months to March, its weakest performance since the end of the last recession in 1992.
The City had expected confirmation of a provisional estimate of meagre 0.1 per cent growth. The revision was due to an unexpected slump in the fortunes of the recently-booming business services sector.
Government bonds rose sharply and the pound fell sharply on hopes of a cut in interest rates, possibly next month. The sterling index dropped 0.7 to 103.5.
Sushil Wadhwani, who joins the Monetary Policy Committee next month, told MPs yesterday that the sterling was strongly overvalued, and would probably decline in the next 18 months. He said the competitiveness of sterling had deteriorated by over 35 per cent since 1995, making it "nearly as uncompetitive as in the dark days of 1981".
Mr Wadhwani could hold the swing vote at next month's interest rate meeting, as the other eight members were split down the middle this month.
Economists are divided over whether interest rates have reached their trough.
The economy expanded 0.6 per cent year on year, a downward revision from a 0.7 per cent estimate and the lowest since autumn 1992, the Office for National Statistics (ONS) said.
The Treasury remained confident the economy will meet the Government's target of 1 per cent growth in 1999. "We have historically low inflation, historically high numbers of people in work," a spokesman said. "Consumers and businesses are optimistic about the future."
The ONS revised down the quarterly growth in the services sector to 0.2 percent from 0.4 per cent. It highlighted a 0.3 per contraction among business services companies, singling out insurance companies, management consultants, architects and engineers, recruitment consultants and the advertising industry. This represented a sharp reverse. Business services grew by almost 1 per cent during the previous two quarters.
Net trade cut GDP by 0.5 per cent in the quarter as exports recorded their second sharp quarterly drop and imports rose. This was the worst impact trade has had on the economy since records began in 1955.
Manufacturing suffered its third successive quarterly decline, contracting by 0.3 per cent in the quarter and 1.2 per cent in 12 months. Although there could be further downwards revisions, most economists believe the UK will avoid technical recession, or two successive quarterly falls in GDP. Most evidence points to a recovery.
One sign of this came in a report yesterday warning of overheating in the housing market. A severe shortage of homes for sale combined with growing demand is threatening to bring about a small-scale repeat of the boom of the late 1980s, according to the Royal Institution of Chartered Surveyors.