Credit card and other unsecured lending to British consumers posted its sharpest drop in nearly two decades in December, supporting expectations that the Bank of England will soon inject more cash into the economy to prevent a deep recession.

A steep decline in money supply also added to views that 75 billion pounds in quantitative easing, or asset purchasing, launched in October are not enough to boost the economy, which may have already entered a mild recession at the end of last year.

Consumer credit fell by 400 million pounds last month - the biggest monthly drop since records began in 1993, the bank said on Tuesday, confounding forecasts for a 400 million pound rise.

Weak consumer spending has been a major drag on Britain's economy, with consumers cutting back on purchases as the rise in living costs has outpaced meagre wage increases and fears of job losses weigh on confidence.

Economists said the numbers confirmed their expectations that the Bank of England was set to inject more stimulus into the economy. Most reckon the bank will announce a 50 billion pound expansion to its quantitative easing programme next week.

The fall in consumer credit reflects individuals' reluctance to take on more debt in a tough economic environment, said Nida Ali, economic adviser to the Ernst & Young ITEM Club. Today's figures support our view that the Bank of England is likely to authorise further asset purchases next month.

Some economists said it was reassuring that consumers were strengthening their finances by paying down debt at a reasonable rate, given the huge amount of debt Britons' racked up in the run-up to the financial crisis.

There's not an aggressive repayment of debt, the flipside of which is a deep consumer recession. It's happening at a more manageable pace, said RBS economist Ross Walker.

The sooner the household sector has debt levels at more manageable levels - and we're still some years away from that - the sooner you'll have a platform for a more sustainable recovery, he added.

CONSUMER HOPES

The Bank of England and the government have pinned their hopes for a pick-up in growth later this year on falling inflation, which should provide cash-strapped consumers with some room to spend more.

British consumer morale climbed to its highest in more than half a year in January, researchers GfK NOP said on Tuesday, but they added the improvement could just reflect a temporary spillover from the Christmas feel-good factor.

The economy shrank in the final quarter of 2011 as manufacturers and construction companies scaled back production, and many economists expect another decline in the first quarter of 2012, which would amount to a mild technical recession.

Carpetright, Britain's biggest floor coverings retailer, issued its sixth profit warning in a year on Tuesday and said it expected dire trading conditions to continue as it cuts prices to lure cash-strapped shoppers.

The BoE data also showed that the housing market was unlikely to provide a major boost for the economy anytime soon.

Mortgage approvals rose to 52,939, the highest number since December 2009 but still below forecast and far off the pre-crisis monthly average of around 90,000.

Economists said the fall in broad money supply provided another sign that more quantitative easing may be necessary to get the economy back on track.

So-called M4 excluding intermediate other financial corporations slumped by 0.7 percent on the month - the steepest decline since this data series began in July 2009. An even broader gauge also had a record fall.

Brian Hilliard, economist at Societe Generale, noted that the decline was driven by a sharp fall in lending to companies, rather than to households. It appears that companies are favouring bond issuance over bank loans for the small amounts of finance they are raising, he said.

(Additional reporting by David Milliken and Fiona Shaikh. Editing by Jeremy Gaunt.)