By Matthew Brown and Morwenna Coniam Oct. 23 (Bloomberg) -- The pound fell the most in a month against the euro after a report showed the U.K. failed to exit the recession in the third quarter, giving the central bank more reason to maintain measures to revive growth. Britain’s currency also slid the most in two weeks versus the dollar, retreating from the highest level in more than five weeks, after the Office for National Statistics said gross domestic product dropped 0.4 percent from the previous three months. Economists in a Bloomberg survey predicted a 0.2 percent increase. Gilts rose and short-sterling futures fell as traders pared bets that the Bank of England will raise interest rates. “It’s going to be quite difficult to hike rates and no doubt expectations of more quantitative easing will be fanned on the back of this news,” said Jeremy Stretch, a senior currency strategist in London at Rabobank International. “That will be another weight on sterling.” The pound dropped 1.2 percent to $1.6427 as of 11:50 a.m. in London, after falling as much as 1.3 percent, the biggest decline since Oct. 9. It fell 1.3 percent versus the euro, to 91.29 pence, having depreciated 1.5 percent, its sharpest slide since Sept. 24. The yield on two-year gilt declined 5 basis points to 0.90 percent. The 10- year gilt yield slipped 3 basis points to 3.67 percent. Britain’s economy has now shrunk for six quarters, the longest period of contraction since records began in 1955, making it more likely the Bank of England will retain its 175 billion-pound ($292 billion) program of bond purchases and keep its benchmark interest rate at a record low of 0.5 percent. ‘Worries to Persist’ The yield on the U.K. interest-rate futures contract expiring in March 2010 fell 4 basis points to 0.87 percent. The GDP data has “led to a short-covering rally in gilts,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “A lot of investors were positioned for positive data, but it surprised to the downside and, as a result, gilts have seen a rebound. Worries about the economy will persist and they will probably extend quantitative easing in November by at least 25 billion.” The central bank began buying government and company debt with newly printed money in March as it sought to hold down borrowing costs in an attempt to haul the economy out of deepest recession since World War II. Gilts fell earlier after Bank of England policy maker Adam Posen said the central bank will have to reverse the emergency bond-purchase program. The bank holds its next scheduled policy meeting on Nov. 5. King Comment “More than six months out, there’s no question we’re going to have to reverse the extreme policy measures we took,” Posen told BBC Radio Scotland. All nine members of the bank’s Monetary Policy Committee opted to keep asset purchases unchanged at their September and October meetings amid signs of an economic recovery. Governor Mervyn King said in an opinion piece in Scotland’s Herald newspaper as recently as two days ago that rates will rise “at some point” and “it would be wise to take this into account.”

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