A black day for Brown's Britain

Gordon Brown suffered a series of crushing blows today on the blackest day so far for credit crunch Britain.

The Bank of England governor admitted the economy was in "deep recession", Mr Brown's banking adviser quit and unemployment soared to almost two million.

Then there were hints of greater scandals to come as the Serious Fraud Office revealed that allegations involving half a dozen financial institutions are being considered for criminal investigations.

The banks crisis swept ever closer to No10 with the resignation of Sir James Crosby.

The deputy head of the Financial Services Authority fell on his sword a day after the Evening Standard revealed allegations that he sacked a whistleblower at HBOS who warned that the bank was taking unacceptable risks.

Sir James denied the charges and said he was quitting for the good of the FSA.

The resignation of Sir James came 30 minutes before Mr Brown faced the weekly Prime Minister's Questions session in the Commons, prompting speculation among MPs that Downing Street had forced Sir James's hand to protect the Prime Minister.

Answering a barrage of questions about why he had appointed, and knighted, a banker so deeply implicated in the City's recent errors, Mr Brown admitted that the FSA, which is at the heart of the City regulation system he himself put in place, was in need of improvement.

The day began with unemployment surging to 1.97million, the highest level since 1997, when Labour took power on a wave of anger at the Conservatives' handling of the economy. Experts fear it will reach one in 10 by the end of next year.

Minutes later Bank of England governor Mervyn King stood up to deliver the bleakest official appraisal yet about the state of the economy.

He said the contraction between last summer and this summer would be around four per cent, which was far more severe than previously forecast.

There is also a significant risk that the slump would prove longer and deeper than feared, with the economy shrinking three per cent this year.

That contrasted bleakly with the pre-Budget report predictions from Alistair Darling which looked to the beginnings of a recovery in the second half of this year.

Mr King said it would all depend on the world economy - and the risks were "significantly on the downside."

In the Commons, Tory leader David Cameron said the Prime Minister should admit he had made mistakes, including the appointment of former HBOS chief executive Sir James as a regulator and adviser to the Government on issues like mortgages.

"Why can't you just admit for once that you made an error of judgment," he demanded.

"Isn't this part of the problem. Sir James has had the decency to resign. Why can't you have the decency to admit you got something wrong?"

Mr Brown ruthlessly distanced himself from Sir James, saying the banker was "no longer an economic adviser of the Government and has only been so in the context of doing two reports".

Returning to the attack, Mr Cameron said: "No apology about boom and bust. No apology about Britain being better prepared.

"Even the bankers have apologised. When are you going to?" But the Prime Minister retorted that without government intervention the banks would have collapsed and turned recession into depression.

"If we had not stepped in to save the banks, I would have had to apologise for not taking the action that was necessary. But we took the right action," he said.

The problem for Mr Brown is that critics are increasingly focusing on his failure as Chancellor to set up a regulatory system to protect the City from itself.

He created the FSA which has been widely criticised for failing to sound an alarm. Mr Brown chose Sir James to serve on it while the latter was still chief executive at HBOS.

Coming close to admitting his regulatiory system had not worked, Mr Brown told MPs: "I believe the system of regulation in this country can and will be improved."