Gordon Brown has been warned that unemployment could surge to three million after official figures recorded the largest jump in joblessness since 1991, showing 1.79 million people were now out of work in the UK.

Capital Economics, a research consultancy, last night forecast that, at the current rate, the number of people claiming Jobseeker's allowance would top one million by the end of this year and that unemployment would rise by 1.5 million to about three million by the end of 2010.

Significantly, the sharp rise in the jobless figures came before the recent global banking crisis, prompting fears that the downturn could be severe and prolonged.

It also emerged yesterday that critics of the planned HBOS merger with Lloyds TSB still maintain that the injection of cash into the Scottish bank, some £11.5bn, meant it could continue as an independent entity. They picked up on comments from the Financial Services Authority, which said it was "content" with the amount of capital HBOS was raising but had concluded it was in the "interests of financial stability for the merger to go through", a position supported by the Prime Minister.

As some Scottish politicians still believe HBOS could survive on its own under the terms of the bailout plan, there was a call for a Commons review of the proposed merger.

While the effects of the banking crisis continued to ripple through the political and financial worlds, the main attention yesterday was grabbed by the latest labour market numbers.

The Office of National Statistics reported that UK-wide unemployment rose from June to August by 164,000, more than 10%, while those claiming Jobseeker's allowance increased for the eighth month running by 31,800 to 939,900, the highest level for almost two years. UK employment levels also slumped, down by 122,000 in the latest quarter to 29.4million, the biggest three-monthly fall since 1993.

Fears of an extended recession pushed the FTSE 100 down, closing 315 points or 7% lower on 4079.

In Scotland, the jobless rate rose 0.7% to 4.7% but still below the UK average of 5.7%. Some 19,000 Scots lost their jobs between June and August, pushing the unemployment total to 124,000. Mr Brown, attending an EU summit in Brussels, declared: "We will do everything we can to help create jobs and help people maintain jobs in the British economy."

Brendan Barber, TUC general-secretary, said the jobless rise was "extremely bad news", noting: "After years when we could take reasonably full employment for granted, we are now in for grim times. This is the next big challenge for the government."

John Cridland, of the CBI, said the numbers were "worse than we expected", suggesting the downturn was being felt by people "faster and sooner than previously thought".

His colleague Iain Ferguson, CBI Scotland's policy executive, said what was worrying was that the jobless figures "pre-date much of the recent turbulence" within the banking sector, "indicating unemployment is likely to rise further through the winter".

At Westminster, William Hague for the Conservatives clashed with Harriet Harman, the Commons leader standing in for Mr Brown during Prime Minister's Questions. The Tory front bencher told MPs that the jobless figures made it a "grim day" for the British economy, suggested ministers appeared complacent and denounced the PM's claim to have abolished boom and bust as "foolish, hubristic and irresponsible".

Ms Harman hit back, denying there was any ministerial complacency.