The UK economy will grind to a halt this year as the threat from the euro zone, tough austerity measures and tight lending conditions drag on the economy, the Bank of England warned.
In its quarterly inflation report, the bank slashed its growth forecast for 2012 to around zero from 0.8% in its May report.
The economy is now expected to grow by around 1.9% in 2013, compared to 2.4% in its last estimate.
The downbeat outlook will increase the chances of further emergency support measures.
These could include a possible rate cut below the current record low of 0.5% and a further cash injection to the Bank's quantitative easing programme.
In a boost to UK borrowers, the bank signalled that it did not expect interest rates to rise above 0.5% until 2015.
"The underlying picture is that output has been at best broadly flat over the past two years, and has continually disappointed of expectations of a recovery," Bank governor Mervyn King said as he presented the gloomy report.
Mr King warned that the UK was "navigating rough waters and storm clouds continue to roll in from the euro area". But he said the contraction in output over the last three quarters - signalling the longest double-dip recession since the 1950s - is probably not as weak as suggested.
He said the extra bank holiday in June for the Diamond Jubilee celebrations will have reduced output by around 0.5 percentage points and should unwind in the third quarter.
The governor also raised doubts over the accuracy of official construction figures which are "at odds" with other survey data. He said early indications on the £80 billion sterling "funding for lending" scheme to unclog the flow of credit were positive, with some banks cutting their loan rates.
"The economy will continue to face headwinds over the forecast period, from the fiscal consolidation and tight credit conditions at home, as well as from the difficulties in the euro area and a broader slowing in the world economy," he warned.
The euro area is hitting demand for UK exports and efforts to rebalance the economy "will require patience", Mr King said.
"GDP growth is more likely than not to be below its historical average rate in the second half of the forecast period. As I have said many times, the recovery and rebalancing of our economy will be a long, slow process," he added.
The bank's report said the near-term outlook for inflation is lower than three months ago, reflecting weakness in price pressures and falling energy prices. Oil prices are around 7% lower in the run-up to the August report than in the run-up to the May report.
The bank reiterated its concerns over the threat of the euro zone crisis to UK growth, and the need for an effective policy response from euro zone finance ministers.
The bank's assumptions are all based on market expectations of a rate cut to 0.25% in the next year. But its governor said a rate cut was not a move the bank would "contemplate immediately" as it would damage some financial institutions.
Looking ahead, Monetary Policy Committee member Spencer Dale said the Olympics should have a small positive contribution to the economy in the third quarter between July and September. He said the lift would come from ticket sales and TV rights, while extra spending from tourism would be offset by travel disruption and Britons leaving the UK for holiday.
