Recession is longest on record

By David Milliken and Christina Fincher

LONDON (Reuters) - Britain's economy contracted in the third quarter of this year, quashing hopes the downturn was ending and instead marking the longest recession on record.

Sterling plunged nearly three cents against the dollar and notched its biggest one-day decline against the euro in six months as traders bet the Bank of England was more likely to expand its quantitative easing programme to secure a recovery.

Prices of government bonds -- the main beneficiary of the central bank's asset purchases -- surged.

Friday's figures are also a blow to Prime Minister Gordon Brown's Labour government, trailing in opinion polls and hoping for recovery to take hold well before an election due by next June.

The Office for National Statistics said British gross domestic product fell by 0.4 percent between July and September, meaning the economy has contracted for six successive quarters for the first time since records began in 1955.

This was much worse than analysts' expectations of a 0.2 percent rise. Not a single analyst out of the 35 polled by Reuters before the data had predicted a negative reading.

"Third quarter GDP is awful, with no positive news within the report," said James Knightley, economist at ING.

"More worryingly from sterling's perspective is the fact that the UK may be the only major economy to have contracted in the third quarter."