Faltering economic growth in the eurozone has cut demand for British exports, leading to a bigger than expected increase in the UK trade deficit.

The euro area is not just going nowhere - it is doing its best to take us with it

Geoffrey Dicks, Royal Bank of Scotland

The value of UK imports exceeded the value of its exports by �2.8bn ($4.3bn) in August, up from �2.4bn in July, the Office for National Statistics said.

The increase far outstripped analysts' forecasts, with most predicting that the trade gap would edge up to just �2.5bn.

The increase in August partly reflected a 9% fall in exports to other European Union countries compared with the previous month, pushing Britain's trade deficit with the EU to a ten-year high of �859m.

Contagion

The figures exacerbated fears that the UK economy, which has escaped the global downturn for the last two years, could soon succumb to it.

"The euro area is not just going nowhere - it is doing its best to take us with it," said Geoffrey Dicks, economist at the Royal Bank of Scotland.

European growth prospects have been downgraded in recent months amid slumping share prices, sluggish job creation, and weak consumer confidence.

British manufacturing groups said the trade figures, which came as the Bank of England's monetary policy committee (MPC) began its monthly interest rate-setting meeting, supported the case for a cut in borrowing costs.

"The MPC must act now to ensure that the UK economy is not blown further off course," said Stephen Radley, chief economist of the Engineering Employers' Federation.

Rate freeze

Manufacturers export a high proportion of their goods, and are therefore sensitive to economic developments overseas.

However, with consumer spending and borrowing remaining persistently high, most analysts expect the MPC - which will announce its decision on Thursday - to leave interest rates unchanged at 4% for the eleventh month in a row.

The European Central Bank is also meeting to set eurozone interest rates this week, but it too is widely expected to leave them on hold.

A continued eurozone rate freeze is likely to put British exporters under more pressure in the months ahead.

"The UK economy would benefit more from a cut in interest rates from the European Central Bank rather than the MPC," said John Butler at HSBC bank.