Alistair Darling sparked a furious backlash from business leaders as he rejected plans to create 40,00 new jobs in the West Midlands - while new figures showed the region had the worst unemployment in the country.

The Chancellor confirmed he was blocking proposals to raise £1 billion for local transport improvements and create thousands of jobs, as he delivered his Budget statement to the Commons.

His announcement came as new unemployment figures revealed 36,000 people have lost their jobs in the West Midlands in three months, bringing the unemployment total up to 223,000.

It means 8.4 per cent of the region’s workforce, almost one in 12, is unemployed. The West Midlands has now overtaken the North East of England to become the region with the highest unemployment rate in the UK, worse than any other English region, Scotland, Wales or Northern Ireland.

But Mr Darling rejected ambitious plans drawn up by Birmingham City Council, Coventry City Council and the Black Country authorities to create a “city region”, with the power to raise funds for transport schemes, including the long-awaited extension to the Midand Metro, and co-ordinate training.

Instead, Manchester and Leeds will become Britain’s first city regions. Mr Darling told the Commons that city region status “will also have a major role in promoting economic investment”.

Mr Darling also faced criticism for not going far enough as he introduced a long-awaited scrappage scheme to boost car sales, with motorists offered a £2,000 discount on new vehicles when they traded in a model that is at least ten years old.

The Chancellor told MPs: “I also want to help the UK’s automotive industry, which has been one of the British success stories of the last decade.”

But carmakers were told they must help pay for the scheme by providing half the cash, while only £1,000 will come from the Treasury.

MP Richard Burden (Lab Northfield) said: “I welcome the announcement, and I would have liked it to go further. The trouble is that a number of vehicle manufacturers are facing very severe cash problems and may not be able to put in the money they are being asked for.”

Mr Darling was force to admit the recession was worse than he had expected, predicting the economy would shrink by 3.5 per cent this year - more than doubling his previous estimate. He said he expected the economy to start growing again by the end of the year.

And he said the Government would be forced to borrow a record £175 billion pounds this year.

The Chancellor said he had delivered a budget to help people in the recession, telling MPs: “Taken together, the total policy support for the UK economy is expected to protect up to half a million jobs.”

Measures included an extra £1.7 billion for Job Centre Plus network and a pledge that everyone under 25 and out of work will receive a job or training from January.