Darling accused of prompting crisis in confidence

Pound at record low against euro w Mortgage approvals dive more than 70% w Export orders fall

Signs of a split at the top of government and the claim by the Chancellor, Alistair Darling, over the weekend that the economic times "are arguably the worst they've been in 60 years" sent sterling plunging to a record low against the euro and its feeblest showing against the US dollar in two years.

The value of a euro rose to 81.39p, its highest since the single currency was launched in 1999. Against the US dollar, the pound was down to just over $1.80, a level not seen in two years. Sterling has seen a depreciation of more than 12 per cent since last summer.

The widely expected announcement of government measures to help the housing market had little effect on sentiment anywhere.

The Conservative leader, David Cameron, accused Mr Darling of provoking a "crisis of confidence" and accused him of "talking the economy down".

The markets delivered a harsh verdict on the increasing disarray over economic policy, and mounting evidence of the manly friction developing between Number 10 and Number 11 Downing Street, as rumours that the Chancellor may soon be sacked or resign persist.

An extension of state support for the mortgage market is only the latest in a series of flashpoints between Number 10 and the Treasury, including the abolition of the 10p tax rate, the idea of a "stamp duty holiday", using public money to finance the mortgage market, and underlying tensions surrounding "spin" form various quarters that Mr Darling was about to be replaced by Ed Balls, the Schools Secretary and long-term Brown amanuensis. The Treasury and the Bank of England seem united in their hostility to any extension of the Bank's Special Liquidity Scheme from Number 10 to "kick start" the mortgage market with taxpayers' funds.

The release of more weak economic data also disturbed the markets, as traders again marked up the chances of the Bank of England having to slash interest rates to rescue a badly faltering economy. Shares fared little better than sterling. The FTSE 100 opened sharply lower, with a 34-point fall in the backwash of Mr Darling's forecast of a downturn "going to be more profound and long-lasting than people thought". Stocks fell further with the release of depressed figures on the housing market, manufacturing and exports. The index of leading shares stands 12 per cent down in the year.

Consumer stocks and the mortgage banks were especially badly hit by the latest figures on mortgage approvals from the Bank of England. The number of new home loans slumped again, to 33,000 in July, below analysts' expectations and down more than 70 per cent on last year. Alan Clarke, UK economist at BNP Paribas, called them "painfully weak" and "consistent with house prices continuing to fall at close to, if not faster than, their recent pace".

Activity in the housing market, especially among first-time buyers, seems set to slow further in the face of falling prices and tighter mortgage lending conditions. Changes in stamp duty and local authorities purchasing unwanted properties or those in mortgage arrears may provide some impetus in the short term, said economists, but few observers expect such initiatives to provide significant support for house prices. Nor is the £60 per basic rate taxpayer "windfall" likely to help, given that it is mostly a reversal of a previous tax hike.

Meanwhile, even the weaker pound seen over the past few months seems to have provided only limited relief for exporters. The Chartered Institute for Purchasing and Supply's monthly poll of managers revealed that export orders contracted again in August after sinking to a six-year low in July. Overall, sentiment among manufacturing firms is marginally improved in August, but is still pointing to contraction.

Roy Ayliffe, director of professional practice at the Chartered Institute of Purchasing and Supply, commented: "Purchasing managers reported that the weak domestic market and inflationary rises added further pressures. Costs continued to surge on the back of high energy, food and fuel prices, while the weak sterling also pushed up the cost of imports. Jobs were axed for the fifth month in a row."