(Bloomberg News) The U.K. economy shrank more than economists forecast in the fourth quarter as manufacturers cut output and services stagnated, leaving Britain on the brink of another recession.

Gross domestic product fell 0.2 percent from the third quarter, when it increased 0.6 percent, the Office for National Statistics said in London today. The median forecast of 33 forecasts in a Bloomberg survey was for a drop of 0.1 percent. Public-sector strikes over pensions on Nov. 30 had "some impact" on GDP in the quarter, the statistics office said.

Bank of England Governor Mervyn King said yesterday that policy makers can increase stimulus again if needed to aid the economy and guard against a "renewed severe downturn." The International Monetary Fund cut its U.K. growth forecasts as the euro-region debt crisis dims prospects for global growth.

"The basic picture will be one of output meandering around zero until the middle of the year," Brian Hilliard, an economist at Societe Generale SA in London, said in a telephone interview before the report. "It's easily possible we could get another negative number in the first quarter. This does leave the door open for the Bank of England to do more stimulus."

GDP rose 0.8 percent in the fourth quarter from a year earlier. In 2011, it expanded 0.9 percent versus 2.1 percent in 2010.

Industrial production fell 1.2 percent in the fourth quarter, with manufacturing contracting 0.9 percent, the biggest fall for more than two years, today's report showed. Construction shrank 0.5 percent. Services, accounting for about three quarters of the economy, stagnated with zero growth.

Services Stagnate

In a separate report today, the statistics office said services industries grew 0.6 in November from October. On a three-month basis, they expanded 0.1 percent from the previous three months.

With the government constrained by its pledge to all but eradicate a budget deficit of 9 percent of GDP, pressure is growing on the Bank of England to expand it 275 billion-pound ($428 billion) bond buying program when the current round of purchases ends next month.

"With inflation falling back and wage growth subdued, there is scope for interest rates to remain low, and, if necessary, for further asset purchases, to prevent inflation falling below the 2 percent target," King said in a speech late yesterday.

Turmoil in the euro region -- the biggest market for British goods --, rising unemployment and government austerity measures are sapping confidence in an economy that has recovered barely a half of the output lost during the 2008-2009 recession, which was the deepest since World War II. Only the recoveries in Japan and Italy are further behind among Group of Seven nations.

IMF Forecast

The IMF yesterday cut its 2012 U.K. growth forecast to 0.6 percent from 1.6 percent as it predicted a mild recession in the 17-nation euro zone and slowing growth in China. Ernst & Young meanwhile says the U.K. economy may contract again the first quarter, marking its first double-dip recession in more than three decades.

The threat of a return to recession will increase pressure on Chancellor of the Exchequer George Osborne over his 150 billion-pound fiscal squeeze, which will cost 700,000 government jobs and see spending cuts persist well beyond the 2015 general election.

Osborne and Prime Minister David Cameron say their deficit- reduction plan is isolating Britain from the havoc in the euro region, where France and Austria lost their top AAA credit ratings at Standard & Poor's this month. The 10-year gilt yield was at 2.18 percent late yesterday in London, compared with rates of 3.15 percent in France and 5.39 percent in Spain.

Bloomberg News