The 26,000 fall confounded economists' predictions, propelled the pound to a three-month high and provided further evidence that recovery is gathering speed.
A raft of surveys and indicators backed up the picture of economic revival. Some 144,212 cars were made in Britain last month, the best March figure since 1974, according to the Society for Motor Manufacturers and Traders. Carmakers expect sales in Britain to grow markedly, although export markets have turned down.
The British Chambers of Commerce reported that business confidence was its highest in four years and that companies in all parts of the country were seeing rising orders.
The Federation of Master Builders said more members were seeing an increase in workload than at any time since early 1990. The Royal Institute of Chartered Surveyors said house sales were reviving, with the improvement beginning to be felt for medium and high-priced houses.
Chris Dillow, economist at Nomura Research, said: 'The green shoots have now become great big trees.'
The City expects next week's figures for national output in the first three months of the year to confirm officially that the recovery is under way, ending the longest recession since the Second World War.
Signs of revival in Britain were reinforced by an unexpected cut in key German interest rates, prompting a wave of rate cuts around Europe.
The Treasury was quick to squash hopes that the rate cuts would be used to justify lower base rates in Britain. It believes the 6 per cent rate is low enough to foster recovery, although warning that it was too early to say that unemployment had peaked.
Unemployment has fallen by more than 50,000 in the past two months and stands at 2,940,800, the lowest since November. For the first time in three years, male and female unemployment fell in all regions.
Largest falls were in the East Midlands, the North and Scotland, while unemployment fell for the first time in this recession in Greater London. Some 10.5 per cent of the workforce were without a job and claiming benefit, down from 10.6 per cent in February.
Britain is the only EC country to have seen unemployment fall last month, having enjoying the biggest monthly drop since September 1989. JobCentre vacancies rose to a two- year high while the number of jobs shed in manufacturing fell to its lowest in eight months in February.
The drop in unemployment stunned the City, which had dismissed February's decline as a freak. Most economists remained cautious, arguing the total was likely to rise on average for the rest of the year at least.
Unemployment normally does not begin to fall until well after recovery is under way, but the jobless total may be turning down early because government moves to weaken trade unions and tougher tests for unemployment benefit have made the labour market more flexible.
John Philpott, of the Employment Policy Institute, said the number joining the dole queue may have fallen as people accepted pay freezes or lower rises to avoid redundancy.
The number of school leavers joining the workforce is also much lower than in the early 1980s.
Bill Martin, economist at UBS, said that companies may be regretting having fired so many people last autumn and winter, when hopes of a post-election recovery vanished.
But economists warned that if the falls in unemployment continued, underlying inflation might soon threaten to break the Government's 4 per cent target ceiling. Hence the Treasury's desire to keep interest rates steady and see the pound rise. That helps to suppress inflation, but might worsen the trade deficit.
Further reports, page 25
Hamish McRae, page 27