UK manufacturing output tumbled unexpectedly and at its fastest pace for six months in March, according to official figures which yesterday added to the headache faced by the Bank of England's Monetary Policy Committee as it deliberated over interest rates.

The MPC began its latest two-day monthly meeting yesterday and is due to announce its rate decision at noon.

A back-to-back cut in base rates today, following up on the quarter-point reduction to 5% on April 10, had looked an extremely remote possibility only last week. Today's decision now looks much more finely balanced after a very weak service sector survey from the Chartered Institute of Purchasing and Supply on Tuesday and yesterday's poor manufacturing numbers.

Adding to the signs of much tougher times, Halifax last Friday reported a further drop of 1.3% in the average UK house price in April. This left house prices last month 3.7% lower than in April 2007 - the biggest such year-on-year drop on Halifax's survey since June 1993.

Before cutting last month, the MPC had reduced base rates by a quarter-point in December and February.

The Office for National Statistics said UK manufacturing output fell by a seasonally-adjusted 0.5% in March - the biggest fall since September last year. The City had predicted an unchanged month-on-month position.

Manufacturing output in March was consequently only 0.6% higher than in the same month of 2007 - less than one-third of the year-on-year growth rate of 1.9% in February.

The ONS said the trend in manufacturing output was still positive because March's fall followed gains in January and February, with advances of 0.4% recorded in each of these two months. This meant manufacturing output in the first quarter was up 0.3% on the final three months of last year.

Wider industrial production, which includes mining and quarrying, oil and gas extraction, and electricity, gas, and water supply as well as manufacturing output, also fell by 0.5% between February and March. This was its biggest monthly drop since February last year.

Year-on-year growth in industrial production tumbled from 1.2% to 0.2% between February and March.

Electricity, gas and water supply showed a month-on-month fall of 1.4% in March.

Industrial production fell 0.2% between the fourth quarter of last year and the first three months of this year, with electricity, gas, and water supply down 1.3% over this period.

The weak manufacturing and industrial production figures yesterday weighed on the pound, which was last night more than two cents down on its close in London on Tuesday against the dollar at around $1.9535.

Paul Dales, UK economist at Capital Economics, said: "The fall in manufacturing output in March supports our view that the industrial sector will not be able to compensate for the consumer slowdown and makes this month's MPC interest rate decision a closer call."

Dales noted the drop in industrial production in the first quarter was slightly greater than the 0.1% dip factored in by the ONS when it estimated last month that overall UK gross domestic product had grown by 0.4% in the first quarter.

He said: "While that (bigger drop in industrial production) is probably not enough on its own to prompt a downward revision, it nonetheless opens the door to the possibility that GDP in Q1 grew by less than 0.4%."

Annualised to 1.6%, the ONS's initial estimate of first-quarter growth is in any case way behind the UK's longer-term trend rate of expansion of about 2.5% to 2.75%.

Putting yesterday's weak industrial data in the context of surveys from the Confederation of British Industry and Chartered Institute of Purchasing and Supply which are "pointing to a sharp slowdown in manufacturing activity", Dales added: "This sits comfortably with our view that a weakening in retail sales growth will mean that the production of consumer goods becomes a sizeable drag on overall manufacturing activity.

"And, despite the lower pound and hopes that the US economy has started to recover, demand from abroad is unlikely to compensate for the domestic slowdown. We continue to think that the manufacturing sector will enter a recession some time this year."

Dales predicted that, while yesterday's manufacturing data would boost hopes of a cut in UK base rates today, "on balance" the MPC would wait until June.

However, Dales added: "More importantly, the fact that the economy is enduring a widespread weakening in activity supports our view that interest rates will eventually have to fall further than most forecasters and the markets are currently expecting."

Capital expects UK base rates to fall to 3.5% by early next year.

Howard Archer, chief UK economist at consultancy Global Insight, said: "The recent stream of weaker data and survey evidence relating to consumer confidence, retail sales, the housing market, the services sector and manufacturing activity suggest that the UK economic downturn is deepening and widening.

"Indeed, we believe GDP growth could slow to just 0.2% quarter-on-quarter in the second quarter of this year from 0.4% in the first quarter and 0.8% in the second quarter of 2007."

Speaking on the eve of today's rate call, Archer said: "This is piling pressure on the Bank of England to reduce interest rates from 5% to 4.75% (today), and the first back-to back interest rate cuts since 2001 now look a distinct possibility despite current elevated inflation pressures."

However, seemingly hedging his bets, he added: "At the very least, interest rates look certain to be down to 4.75% by June."