Global stock markets also fell as nervous investors cashed in quickly on profits from a major rally earlier in the week founded on greater optimism that the crisis may be beginning to ease and there could be a recovery next year.

Australia, Germany and Japan underscored sweeping US proposals for stronger oversight ahead of a crisis summit next week where world leaders will try to draft new measures to tame the sharpest economic downturn since World War II.

The stiff challenge facing Group of 20 nations in London April 2 was made painfully clear Friday when official data showed the British economy shrank a sharper than expected 1.6 percent in the fourth quarter of 2008.

Analysts said there was worse to come for an economy that along with Japan, the United States and the 16-nation eurozone is hobbled by recession.

"Worryingly, latest data and survey evidence point to GDP (gross domestic product) contraction at least matching the fourth quarter 2008 drop in the first quarter of 2009," said Howard Archer from IHS Global Insight consultancy.

"Furthermore, the economy is clearly entering the second quarter still strongly in reverse."

Archer said that Britain would likely "suffer a further modest overall GDP contraction of 0.3 percent in 2010 as recovery develops very gradually."

The news from Britain came as markets fell around the world. On Wall Street the Dow Jones was down 1.52 percent in late morning trading, London was down 0.77 percent in the late afternoon and Tokyo closed down 0.11 percent.

Analysts said stocks were lower because investors were booking profits from rallies earlier in the week, pushing down prices despite some positive news such as a second consecutive monthly rise in US consumer spending.

The data was less rosy in Europe however where growth forecasts for Austria were slashed to as low as minus 2.7 percent for 2009 and Italy reported industrial orders plunging 31 percent in January from January 2008.

Official figures from France and South Korea meanwhile revealed fourth quarter slides in economic momentum but by less than had been predicted.

In corporate news, Germany's Commerzbank posted a 2008 net loss of 6.6 billion euros (nine billion dollars) and industrial group ThyssenKrupp said it may be forced to close some sites because of the slump in global demand.

Greater regulation also emerged as a focus for government responses to a meltdown that has been partially attributed to excessive and imprudent risk-taking by financial institutions, notably in the United States.

US President Barack Obama's administration on Thursday put forward proposals for far-reaching regulatory reform, including a single entity to oversee key US financial enterprises and payment systems and greater oversight of hedge funds.

A near-collapse in the US housing sector stemming from trillions of dollars in securities tied to high-risk home loans triggered a financial tsunami across the globe and plunged the world's largest economy into recession.

Among institutions exposed to the soured securities was US insurance giant American International Group (AIG), which had to be saved by an unprecedented government bailout of more than 170 billion dollars.

Under the US proposals, the government will for the first time regulate markets for credit default swaps, a form of insurance against loan defaults at the heart of the financial crisis, and for over-the-counter derivatives.

In Washington, visiting Australian Prime Minister Kevin Rudd called for the biggest shake-up of the international financial order since World War II.

He said he wanted the G20 to work on cleaning banks of toxic assets, praising a US plan for a private-public partnership to buy up such debt.

Japanese Prime Minister Taro Aso later echoed the call Friday.

"We will have to emphatically argue that the foundation of the International Monetary Fund is weak and that we must establish financial regulations and supervision," he told a legislative session.

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