Sir Edward George, governor of the Bank of England, said it was "too soon to say" whether Britain would avoid a recession in the aftermath of the terrorist attacks on New York and Washington.

But he said that central banks were ready to lower interest rates further, if the economic situation deteriorated.

In a sombre-toned interview on BBC1's Breakfast with Frost on Sunday, he admitted that "these tragic developments could not have happened at a worse time" for the global economy.

"The overall impression is that we will see some weakening in the current quarter and perhaps in the next quarter," Sir Edward added.

Central banks in all the large economies would respond with extra interest rate reductions if required. "All of us are watching really intensively and will take further action if we conclude that it is necessary in the light of what we see as we learn more about what the impact is."

The Bank of England's next scheduled interest rate decision is on October 4. Financial markets expect UK interest rates to fall by another quarter of a percentage point to 4.5 per cent.

Sir Edward reiterated his belief that after a brief interruption in growth, prospects for the economy remained sound. "It is very difficult to see what has changed fundamentally . . . if you look beyond the short-term there is no reason to think that the world is going into a really serious decline."

There had been encouraging economic signs since the September 11 attacks. After a brief spike, oil prices had not increased significantly.

He suggested that severe volatility in equity markets at the end of last week showed they were trying to find a level. The modest fall in sterling against the euro was welcome.

Sir Edward attempted to reassure investors that the sharp falls in equity markets would not last long: "You do need to have rather calm nerves and look at these things in a considered way."

But Sir Edward's view of the economic prospects in Britain and elsewhere has become much more pessimistic in the past two weeks. Speaking as chairman of the Group of 10 central bankers of the largest economies on September 10, the day before the terrorist attacks, he said he believed the slowdown was "showing signs of levelling off".

He dismissed talk of recession at that time, suggesting that it was not even part of the central bankers' discussions: "Funnily enough, I'm not sure I remember the word 'recession' being used".

Two days after the attacks, he appeared to rule out interest rate cuts in response to deteriorating economic conditions. "You have to wait until you have actually seen the evidence . . . whether or not recent tragic events do damage confidence, in particular among American consumers".