Britain’s economy is on the verge of recession, the Bank of England has warned for the first time.

In his gravest assessment yet, the Bank’s governor, Mervyn King, said the economy would start to shrink by the end of the year, for the first time since the early 1990s.

He warned that households faced an “extremely difficult” year as Britain was hit by rising energy and oil prices and the worst financial crisis “since the Second World War.”

Setting out a gloomy prognosis, Mr. King also warned that inflation would rise to 5% or above — the highest in 16 years. He added that house prices would continue to fall, despite having already seen the fastest drops since records began, and that thousands more workers would lose their jobs.

His comments came as new figures showed unemployment rising at its fastest rate since the last recession. The number out of work jumped by 60,000, to 1.67 million, in the three months to June.

Following his forecast, the pound fell to its weakest level against foreign currencies since 1996.

Presenting the Bank’s quarterly inflation report, Mr. King said: “There is a feeling of chill in the economic air.”

He slashed his forecast for growth, acknowledging that by the end of this year the economy would be shrinking rather than expanding — which last happened in 1992.

The governor added that a technical recession — in which the economy shrinks for two successive quarters — was more than possible.

“It is bound to be the case there will be a quarter or two of negative growth,” he said.

“Oil prices are at the highest level in real terms at any point in the post-war period apart from the late 1970s, and we’ve also seen the biggest financial dislocation since the Second World War. What is unique is that both shocks have happened at the same time, and the combination has meant that life is extremely difficult, and will be for the UK economy over the next year.”

He said disposable incomes would shrink as rising prices and the growing tax burden ate deep into wages.

The warning followed a stream of negative economic news. The Office for National Statistics announced this week that inflation was 4.4% in the year to July — the highest since 1992 and double the Bank’s 2% target.

Mr. King insisted that the next few years would not be as painful as the early 1990s, when millions of families faced negative equity and a million people lost their jobs.

He also predicted that after two tough years the economy, and eventually the housing market, would recover their strength.

Mr. King’s forecast leaves Alistair Darling’s projections for strong economic growth this year and next looking hopelessly optimistic.

The Chancellor is likely to have to slash his forecasts by more than any of his recent predecessors in his autumn pre-Budget report.

Mr. Darling said: “The UK, like other economies, is seeing the consequences of globally high energy and food prices. We know the impact that this is having and will continue to support families and business through these tougher times.”

The British Government is considering emergency measures to help the housing market, including a stamp duty holiday and a scheme for local authorities to buy unsold homes.