Bush is pinning his hopes on tax cuts

The figures - called the "grand canyon of trade deficits" by one analyst - came as separate data hinted at the possible return of inflation, which has been hovering close to zero.

The gloomy data - compounded by continuing worries about a possible war in Iraq - depressed hopes of an early economic recovery.

They also weighed heavily on stock prices, with the Dow Jones industrial average dropping 86 points, or 1.1%, to close at 7,915.

Record deficits

Tim Anderson, a senior trader at Salomon Smith Barney in New York said: "People aren't terribly convinced about the economic recovery or the extent to which the Bush economic stimulus plan will be passed, on top of dealing with a lot of uncertainty about Iraq."

The Commerce Department's final monthly trade tally for 2002 showed a deficit 21.5% higher than the $358.3bn trade gap in 2001.

The new $435.2bn imbalance beat the previous record of $378.6bn in 2000.

The deficit with Germany set a record and the gulf with Japan was the highest since October 2000.

The US deficit with China soared to a record $103bn, the largest the US has ever had with any country.

Meanwhile, wholesale inflation, which has been virtually non-existent, jumped by 1.6% in January, its biggest increase in 13 years, according to figures from the Labour department.

Inflation

Many analysts dismissed the wholesale price figures as a temporary blip, reflecting a surge in energy prices and the ending of certain car sales discounts.

And the increases seem unlikely to be passed on to consumers, with the leaders of some of America's biggest companies warning on Thursday there would be little scope for price rises over the coming year.

The CEOs, meeting at a conference in Boca Raton, Florida, said any growth in profits would have to come from cutting costs and improved productivity.

Meanwhile, President George Bush has warned future economic growth hinges on Congress passing his $695bn tax cut plan.

G7 meeting

Delivering a speech at an Atlanta High School on Thursday, Mr Bush said: "If Congress doesn't act there is a risk we won't have economic vitality."

He cited a recent growth forecast by blue chip economists, which he said depended on the tax cut being passed this year.

Some economists have publicly questioned Mr Bush's plan, saying it would harm the economy and increase inequality.

Meanwhile, US Treasury Secretary John Snow acknowledged the possibility of war with Iraq was casting a cloud over the global economy.

Mr Snow spent Thursday in London meeting British business leaders and officials en-route to Paris for a weekend meeting of Group of Seven (G7) finance ministers.

He said the situation in Iraq would form a "backdrop" to the meeting, but would not be an agenda item.