The UK's stuttering economic recovery was given a boost yesterday when the Bank of England heeded industry calls for a cut in interest rates.

In a dramatic first meeting as governor for Mervyn King, the bank voted to lower the cost of borrowing by a quarter of a percentage point to 3.5 per cent.

The move was welcomed by industry leaders, while homeowners could see £12 lopped from monthly payments on an average £80,000 mortgage.

Woolwich and Sainsbury's Bank were among lenders to pass on the full reduction to customers.

Interest rates, which have been held at a 48-year-low of 3.75 per cent since February, are now the same as in January 1955.

But hopes of a double boost for UK manufacturers failed to materialise when the European Central Bank kept its rate at two per cent.

Explaining its reasons for a cut, the Bank of England pointed to the "hesitant" global economic recovery, adding inflation could run below its target of 2.5 per cent unless action was taken to stimulate activity.

It said: "Although the preconditions for recovery remain in place, the prospect for external demand for UK output is weaker than previously expected."

The announcement took many economists by surprise as expectations had been for the Bank to continue its "wait and see" approach until it received further inflation data next month.

Experts in the City have not ruled out further cuts for UK interest rates later this year.

Business groups praised the decision and said the action had been justified by the ailing state of the manufacturing sector.

David Frost, director general of the British Chambers of Commerce, said: "The new governor has started on the right foot. We applaud the bank for seizing this opportunity to stimulate spending and investment.

"The business sector needs a boost - manufacturing continues shedding jobs and the service sector has also suffered a slowdown."

Yesterday's announcement comes after data earlier this week showed the manufacturing sector remained in the mire, with output weakening in May.

Gross domestic product growth also stuttered to 0.1 per cent in the first three months of the year.

Meanwhile, surveys have suggested confidence among consumers has waned after High Street demand had previously propped up the UK economy.

The rate cut immediately raised fears lower borrowing levels could reignite the house market and encourage consumers further into debt.

Friday July 11, 2003