Fears that Britain is heading for an unprecedented triple-dip recession are mounting after official estimates revealed the economy shrank by a worse-than-expected 0.3% at the end of last year.
The fourth quarter decline in gross domestic product (GDP) marks a sharp reversal of the 0.9% rebound seen in the previous three months, while the economy flatlined in 2012 as a whole and is now not expected to regain its peak level for another two years.
Labour accused Chancellor George Osborne of being "asleep at the wheel" amid increasing criticism over his austerity programme and as Britain faces the threat of losing its coveted AAA rating after all three major ratings agencies put the country on negative outlook.
Mr Osborne insisted he would not "run away" from the problems facing the UK economy, but is under pressure to do more to support growth in his upcoming March budget. He said: "We have a reminder today that Britain faces a very difficult economic situation.
"A reminder that last year was particularly difficult, that we face problems at home because of the debts built up over many years and problems abroad with the eurozone, where we export most of our products, in recession. Now, we can either run away from those problems or we can confront them and I am determined to confront them so that we can go on creating jobs for the people of this country."
Experts fear the fourth quarter decline has put the UK on course for the first triple dip since official records began. GDP - a broad measure for the total economy - would have to contract again this quarter for the UK to be back in recession, but hopes of a rebound are starting to fade after a snow-hit start to 2013.
While the figures from the Office for National Statistics (ONS) are preliminary estimates and subject to revision, they have dealt a blow to recovery hopes after the UK bounced back from the longest double-dip recession since the 1950s in the third quarter. With the snow estimated to have cost the economy more than £500 million a day, there is little hope for the current quarter as consumer and business confidence also remains low.
Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club, said last week's snow "rings alarm bells" for the economy. GDP suffered contractions at the start of 2012 and end of 2010 during snow disruption.
Shadow chancellor Ed Balls said now was the time for a "plan B" to support growth through VAT cuts and spending on infrastructure. He added: "The longer David Cameron and George Osborne cling on to their failing plan the more long-term damage will be done. They must finally listen and act to kick-start this economy."
The fourth quarter drop is worse than expected, with most economists having forecast a decline of 0.1%. But experts said the economy was suffering "payback" from the rebound in the third quarter, which was fuelled by the Olympics and clawed back activity that was lost during the Queen's Diamond Jubilee holiday.