The Bank of England today cut its forecast for British growth and warned that the euro zone debt crisis was the biggest threat to Britain's recovery, even if a credible solution is found.
Britain's gross domestic product was predicted to grow by just under 1% this year, it said in a quarterly report.
This was down from the central bank's previous forecast of just over 1%.
"The prospects for UK growth remain unusually uncertain," the Bank of England said.
The Bank of England also cut its 2013 growth estimate to 2%, which marked a major downgrade from the 3% expansion that was estimated in February. Annual inflation was forecast to remain stubbornly above the central bank's 2% target until mid-2013.
"The single biggest threat to the recovery stems from the challenges within the euro area, in particular the need to reduce the indebtedness and improve the competitiveness of some member countries," the Bank of England said.
"Even if a credible and effective set of policies is successfully implemented, the scale of the necessary adjustments suggests that a prolonged period of sluggish growth and heightened uncertainty is likely. A failure to implement such policies could have severe implications for the UK economy," it added.
The bank said that its rate-setting Monetary Policy Committee could not predict a worse-case scenario for the ongoing sovereign debt crisis in the euro zone, which is Britain's main trading partner.
"As was the case in past reports, the MPC sees no meaningful way to quantify the size and likelihood of the most extreme possibilities associated with developments in the euro area," it said.
Bank of England goveror Mervyn King told journalists at a central London press conference that the outlook was highly uncertain. "We are navigating through turbulent waters, with the risk of a storm heading our way from the continent. We don't know when the storm clouds will move away."
Recent data showed the economy shrank 0.2% in the first quarter, after a 0.3% contraction in fourth quarter of 2011, hit by fallout from the euro zone crisis which is currently centred on Greece. That placed Britain back in recession, which is defined as two successive quarters of contraction.
