British retail sales fell last month, major lenders have slashed credit lines to firms and export demand slumped at its sharpest rate in more than a decade, taking the shine off recent optimism about economic recovery.

There have been signs Britain could emerge from recession before any other big economy, with some forecasters saying the recession may even have ended this quarter - but policymakers are much more cautious and expect a sluggish return to growth.

As such, there has been speculation that the Bank of England (BoE) could expand its £125 billion ($205bn) asset-buying programme.

The Office for National Statistics said yesterday retail sales fell 0.6pc last month after a 0.9pc rise in April and below forecasts for a reading of 0.4pc growth. Sales were 1.6pc lower than a year ago.

The BoE's Trends in Lending report, which takes data from the biggest banks, showed the biggest fall in lending to businesses since June 2000 - down £5.4bn in April.

'The various policy measures undertaken by both the Bank of England and the government to boost bank lending are still to feed through to have a major impact,' said Howard Archer, an economist at Global Insight.

'This is worrying for recovery prospects and further increases belief that the Bank of England will have to further extend its quantitative easing programme.'

In the minutes to this month's interest rate meeting, BoE policymakers highlighted ongoing credit constraints as a key downside risk to recovery.

Lending to firms was only up 1.3pc on a year ago in April - compared to an average 17.1pc throughout last year.

'It is too soon to reverse the extraordinary policy stimulus that has been injected into the UK economy through monetary policy, the provision of liquidity support to banks, guarantees of bank funding and fiscal policy,' BoE governor Mervyn King said.

As well as embarking on an unprecedented programme of quantitative easing, the BoE has cut interest rates to a record low of 0.5pc and the government has unleashed more than £20bn in fiscal stimulus measures to boost the economy.

Hopes that weaker sterling would support manufacturers - and hence the recovery - by making their exports more competitive have also faded somewhat.

The Confederation of British Industry said factory orders fell slightly more than expected in June, with the export orders balance falling to -52 this month from -46 in May - the lowest since October 1998.

And Britain's public finances deteriorated further last month, posting the worst public sector net borrowing figures on record - borrowing of nearly £20bn.