Business leaders piled on the pressure for a deep rate cut today as Bank of England policymakers prepare their response to the worst financial turmoil in living memory.

Virgin billionaire Sir Richard Branson called on the Bank's Monetary Policy Committee (MPC) to slash rates as much as 1% when it votes on Thursday.

The call comes after both the British Chambers of Commerce - which warned today that the UK is already in recession - and the CBI business group both pressed for 0.5% cuts.

The MPC has held rates at 5% since April because of inflation fears but the unprecedented chaos in financial markets has sent shockwaves through the banking system and threatens to tip the UK into a deep recession.

Since the collapse of US investment bank Lehman Brothers on September 15, there have been bail-outs and nationalisations on both sides of the Atlantic, including Bradford & Bingley in the UK.

London's FTSE 100 Index plunged to its biggest fall since Black Monday in 1987 this week as the turmoil spread through Europe, while interbank lending has all but ground to a halt, seizing up the financial system.

Sir Richard - who also called for the UK to guarantee all UK savings deposits - said: "I think there should be a very big interest rate drop this Thursday, as much as 1%."

A snap poll of thousands of small firms by the Federation of Small Businesses also showed the "devastating" impact of the credit crunch as borrowing costs soar.

Other central banks around the world have responded to the turbulence by slashing rates. The Australian central bank cut rates by 1% yesterday.

If the Bank of England cuts by 0.5% it will be the first time it has moved rates by more than 0.25% since November 2001, when the MPC voted for a 0.5% cut in the wake of the 9/11 terror attacks.

Douglas McWilliams, chief executive of the Centre for Business and Economics Research, said the Bank should move as soon as tomorrow with a 1% cut.

He said: "With the UK economy almost certainly already in recession the MPC should follow the Australians' lead and cut base rates by around 1%.

"They could show the markets that they grasp the urgency of the situation if they do it on Wednesday rather than waiting for a day and a half of discussion and announcing on Thursday lunchtime."

His comments come as the latest official figures showed manufacturing output declining for six months in a row for the first time since 1980.

The UK's dominant services sector - accounting for almost three-quarters of the economy - also shrank at its fastest rate for more than 12 years last month, according to an industry survey last week.

The MPC has been deterred from lowering rates so far because soaring oil, food and energy bills have pushed inflation to more than double its 2% target at 4.7%.

But with oil prices now below 100 dollars a barrel, and more than 50 dollars below July's record high economists have argued that recession has replaced inflation as the immediate threat.

Global Insight's chief UK and European economist Howard Archer said: "With heightened financial sector problems and very tight credit conditions increasing the risk that the UK could suffer an extended, deep recession, we believe the Bank should respond with a 0.5% rate cut to 4.5% on Thursday."