(Adds Brown quotes on lending)
By Sumeet Desai and Fiona Shaikh
LONDON, Jan 8 (Reuters) - The Bank of England cut interest rates by half a percentage point on Thursday to a record low of 1.5 percent and economists expect it to cut again in February as it battles to prevent Britain from falling into a deep slump.
British interest rates have now fallen by 3.5 percentage points since October as policymakers caught on the hop by the severity of the downturn pull out all the stops to revive an economy facing its first recession since 1992.
In a statement accompanying its decision, the BoE said output was likely to keep falling sharply in the first half of the year, although recent tax and interest rate cuts combined with the sharp fall in sterling would give the economy a boost.
Rates in Britain never fell below 2 percent even during the Great Depression of the 1930s, underlining the scale of the current crisis hurting economies all around the world. In the United States, rates now range between 0 and 0.25 percent.
Economists said the BoE would cut again next month and interest rates could even fall below 1 percent, perhaps alongside a signal they would stay very low for a very long time. Even boosting the money supply has not been ruled out.
"They are still in cutting mode but have taken their foot off the gas this month," said Alan Clarke, UK economist at BNP Paribas.
The pound, down 15 percent against the euro since the BoE started its aggressive interest rate campaign in October, rose after the decision as many in the market had been pricing in a bigger move after the last month's 1 point reduction.
Short sterling interest rate futures also turned negative as markets priced in less aggressive monetary easing ahead.
The BoE said further measures were also needed to increase lending to businesses and consumers. One of the key causes of the current downturn is that banks are unwilling to extend credit as they struggle to repair their own balance sheets.
Prime Minister Gordon Brown promised on Thursday more measures in the next few weeks to get banks to resume their lending.
"So we want to move from the capitalisation of the banks to securing the funding that is necessary, for business projects, for home ownership and for the everyday business concerns that people have in the banking system," he said.
DEEP DOWNTURN
The lack of credit after years of cheap money is driving more and more businesses to the wall while ordinary Britons who racked up more than a trillion pounds of debt in the good years are now having to severely curtail their spending.
Thousands of jobs have been lost in Britain's retail sector alone over the last month with some big high street names such as Marks & Spencer shutting stores and Woolworths disappearing altogether.
Britain's two biggest employment agencies, Hays and Michael Page, warned of deteriorating market conditions on Thursday, and said they had cut hundreds of their own staff in response to the slowdown.
After more than a decade of growth, the British economy is forecast to shrink by 1.6 percent in 2009 and finance minister Alistair Darling hinted this week that he no longer expects a swift recovery in the second half of the year.
Further tax cuts or higher government spending look likely in the March budget. BoE policymakers have also been pondering ways to boost the economy if and when they run out of room on cutting rates.
Quantitative easing, literally boosting the money supply, as undertaken by Japan in the early 2000s may be some way off for now but is now crossing the radar of central banks all around the world. The U.S. Federal Reserve has already taken steps to buy up assets.
Any such move in Britain would require government approval and Darling killed speculation on Thursday that such policy measures were imminent. "Nobody is talking about printing money," he told reporters.
For now, the BoE is more likely to commit to keep rates low when it publishes its next set of quarterly forecasts in February.
"The risks of deflation and the general woes of the economy clearly imply that the Monetary Policy Committee will bring rates down as far as it can. We assume this is 0.5 percent--0.75 percent, but it could be lower," said Philip Shaw, chief economist at Investec. (Additional reporting by Matt Falloon, Christina Fincher, Keith Weir, Adrian Croft and Avril Orsmby; editing by Stephen Nisbet)