British factory output unexpectedly fell in September, recording its first annual decrease in a year-and-a-half, official data showed on Monday.

The Office for National Statistics said manufacturing output fell 0.6 per cent on the month, compared with expectations of an unchanged reading, and the largest monthly fall since February.

On the year factory output was down 0.1 per cent, against forecasts of a reading of 0.6 per cent growth, and this was the first annual fall since February 2006.

Sterling fell against dollar and interest rate futures rose after the data which came alongside a weaker than expected services sector survey, indicating that the economy is softening in the wake of higher interest rates and the credit crunch.

Most economists have said they expect the Bank of England to hold interest rates at 5.75 per cent on Thursday but signs of weakening across the whole economy have raised the chances of a 25 basis point cut.

"A no change decision is not a done deal and we see a significant chance of a cut," said Philip Shaw, chief economist at Investec.

The broader measure of industrial production activity fell 0.4 per cent on the month and 0.2 percent on the year - also well below expectations. The ONS said the figures were likely to lead to a downward revision of 0.04 percentage points to third quarter GDP growth.

The first estimate showed 0.8 per cent quarterly growth.

The economy grew at its fastest annual rate in more than three years in the third quarter, according to that initial estimate.

Five sub sectors decreased and eight increased during the quarter, although there was a 0.6 per cent increase in output between August and September.

Over the quarter there was a 1.3 per cent decrease in output from the mining and quarrying sector, while output in energy supply sector increased by 0.8 per cent.

Oil extraction output decreased by 2.3 per cent as routine maintenance in August continued into September and repair work at one oil field further reduced extraction during the quarter.

Gas extraction output also decreased during the quarter. The ONS said the electrical and opticals sector contributed most to industrial weakness in September, where output fell by 1.7 per cent on the month.

There were no significant increases in output during the month.

Ronnie Bowker, Ernst & Young's senior partner in Birmingham said: "Against a backdrop of rising oil prices, a strong pound, and a fall in business confidence, the manufacturing sector is showing remarkable resilience.

"Manufacturing output for the last quarter remained stable, when compared to the Q2 2007 figures, and reassuringly the statistics are 0.4 per cent higher than the same period last year.

"However the slight decline in output during August and September is perhaps an early warning sign that the industry is under considerable strain and in need of a boost if current rates of growth are to be maintained.

"Manufacturers will be looking to the Monetary Policy Committee on Thursday to provide some much needed relief, in the form of a quarter per cent cut in interest rates."