Britain’s economy shrank more than expected at the end of 2012 with a North Sea oil production slump, lower factory output and a hangover from London’s Olympics pushing it perilously close to a “triple-dip” recession.

The country’s gross domestic product fell 0.3 per cent in the fourth quarter, the Office for National Statistics said yesterday, sharper than a 0.1 per cent decline forecast by analysts.

The news is a blow for Britain’s Conservative-led Government, which a day earlier defended its austerity programme against criticism from the International Monetary Fund. It needs solid growth to meet its budget targets, keep a triple-A debt rating and bolster its chances of winning a 2015 election.

Sterling fell to its lowest in more than 13 months against the euro and hit a five-month low against the dollar in response to the data.

The euro was also buoyed by a stronger-than-expected German IFO sentiment survey.

“There are no positive takeaways from today’s first (GDP) estimate,” said Lee Hopley, chief economist for the EEF manufacturers’ association. “Even assuming some unwinding of activity from the Olympics boost in the previous quarter, this still leaves no real signs of underlying growth in the economy.”

Britain’s economy is now 3.3 per cent smaller than its peak in Q1 2008, having recovered only about half the output lost during the financial crisis – a worse performance than most other major economies.

The country slipped back into recession in the last three months of 2011, and only emerged from it in the third quarter of 2012, after a boost from the London Olympics.