The Bank of England signalled on Wednesday it may have to pump more cash into an economy teetering on the brink of a contraction, slashing its inflation and growth forecasts as fears over the euro zone crisis deepen.

Bank Governor Mervyn King said market conditions had deteriorated since August meaning Britain's economy could well stagnate until the middle of next year. But, presenting gloomy quarterly forecasts, he warned there was only so much that monetary policy could do.

The Bank, which expanded its asset purchase programme by 75 billion pounds to 275 billion pounds last month, predicted inflation would fall to 1.3 percent by late 2013. It expects inflation to fall below target by the end of 2012.

The central bank also sharply revised down its near-term growth forecasts, and now sees a strong chance that annual growth rates will be below 1 percent throughout 2012.

Sterling fell and gilt futures deleted losses in the aftermath of the dovish report which supported economists' forecasts that the central bank will add another 50 billion pounds of stimulus at the time of its next Inflation Report in February.

The immediate impact of the decline in sentiment is that the outlook for growth for the world economy has worsened since August, King told reporters.

That is also true here in the United Kingdom, where activity could be broadly flat until around the middle of next year.

The Bank said slowing global demand, concerns about the solvency of several euro area governments, increasing strains in banking and some sovereign funding markets would weigh heavily on growth in the near term.

Moreover, even if euro zone policymakers come up with a plan to resolve the debt crisis, growth in Britain's largest trading partner was set to remain weak.

A failure to meet these challenges would almost certainly have significant implications for the UK economy, it said, adding that there was no meaningful way to quantify the most extreme outcomes.

Britain's economy is already enduring a tough austerity plan, which the government has said it will stick to regardless of concerns about a lack of growth in the economy.

The message that comes out here is that more QE will be necessary at some point, and probably quite aggressively so, said Philip Shaw, chief economist at Investec.

The Bank said there remained a range of views on the Monetary Policy Committee about the likely strength of the recovery as well as the risks to inflation. The Bank's forecasts showed that the economy would pick up towards the end of the two-year horizon, with growth seen at around 3.1 percent at the end of 2013.

Inflation eased to 5 percent in October and King said in an explanatory letter to the government on Tuesday that he expected it to fall sharply in the next six months and return to around target by the end of 2012 as one-off effects from this year's VAT rise fall out of the data.

The Inflation Report reiterated that view.

In its August forecasts, the Bank had expected inflation to fall to just over 2 percent by the end of 2012 and to 1.7 percent by the end of 2013.

(Additional reporting by Matt Falloon, Keith Weir, Stefano Ambrogi, Peter Griffiths, Olesya Dmitracova and Noami O'Leary; Editing by Ruth Pitchford)