Bank of England governor Sir Edward George has hinted that interest rates might need to be cut to protect the economy from the effects of falling stock markets.

The sharp further falls in equity prices have given rise to concerns about the strength of business and consumer confidence

Sir Edward George

In a speech to business leaders in Manchester he said there had been a "nervous breakdown" in the international markets.

He said this was due in part to fears of international terrorism, high profile corporate collapses in the US and concerns about the impact of a war on Iraq.

Sir Edward said that as a result the Bank's Monetary Policy Committee (MPC) - which sets interest rates - would have to consider whether to cut rates to inject fresh confidence into the markets.

Spending risk

"Whatever the causes, the sharp further falls in equity prices have given rise to concerns about the strength of business and consumer confidence, and to doubts as to the sustainability of the global recovery," he said.

"Internationally, and here in the UK, both in financial markets and within the MPC, the monetary policy debate has shifted back to the possible need for monetary stimulus."

But Sir Edward acknowledged that there was a "risk" in trying to keep the economy going by cutting rates to encourage consumers to borrow money to carry on spending.

He said it could lead to an "abrupt retrenchment" if households suddenly decided they needed to start paying off their debts.

Interest rates are currently at 4.0% - their lowest level for 38 years.