Economy at its weakest since 1992

By Sumeet Desai and Matt Falloon

LONDON (Reuters) - The economy failed to expand in the second quarter of this year for the first time since the slump of the early 1990s and reinforcing expectations interest rates will have to fall to avoid a painful recession.

The Office for National Statistics revised down its GDP reading to show it was unchanged on the quarter in the three months to June from an initial estimate of 0.2 percent growth and down from 0.3 percent growth in the first quarter.

That larger than expected revision was the lowest reading since the second quarter of 1992 when the economy was in the throes of its last recession. On the year, GDP was just 1.4 percent higher, the weakest since the final quarter of 1992.

Sterling and the FTSE 100 index fell and interest rate futures rose after the data boosted expectations that borrowing costs will need to fall to prevent a deep and protracted slowdown as the credit crunch bites.

"This really does put a rate cut firmly on the agenda although it is unlikely to come until we have seen the peak in inflation," said Brian Hillard, an economist at Societe Generale.

The Bank of England is already factoring in the economy standing still over the next year and has said growth needs to slow to tame inflation, which is running at more than double the central bank's 2 percent target and expected to spike higher.

The figures are likely to fan further criticism of Prime Minister Gordon Brown's handling of the economy. He will no longer be able to boast of the economy growing continuously since the Labour government came to power in 1997.

But the government has argued all the major industrialised nations are suffering. The euro zone economy contracted in the second quarter.