The number of Britons out of work rose to its highest level in more than 17 years in October, and these jobless figures look set to rise further as firms facing the threat of a renewed recession cut back on staff.

While a surprise slowdown in the number of jobless benefit claims over the past two months provided a glimmer of hope, many policymakers see the country on the brink of a sharp downturn as the euro crisis rages on and government spending cuts bite.

The Office for National Statistics said Wednesday the number of people out of work in the three months to October rose by 128,000 to 2.638 million, its highest level since 1994.

A downturn in the UK labor market provides further evidence that the economy is sliding back into contraction, said Chris Williamson from research firm Markit. The number looks set to continue to increase, as private sector job losses mount on top of cuts to public sector staffing levels.

Bank of England chief economist Spencer Dale also warned that Britain's economy may shrink for one or two quarters before making a gentle recovery in the second half of the year.

The central bank has already responded to the gloomy outlook by pumping more money into the economy, and many BoE watchers expect the central bank to increase its asset purchases in February beyond the current total of 275 billion pounds.

The government's ability to boost employment is limited by its pledge to erase a budget deficit of nearly 10 percent, and at the end of November finance minister George Osborne announced further austerity steps to safeguard the top-rating for Britain's government debt.

There's certainly an unemployment challenge for us, employment minister Chris Grayling told Sky News TV. But what I do want to do is send out a message that there have at least been some signs of stabilisation over the last month.

Economists also noted with some relief that the labor market deterioration did not pick up pace. The unemployment rate held steady at 8.3 percent, in contrast to forecast for a rise and the slowdown in the pace of new jobless benefit claims.

Three thousand Britons signed up for unemployment benefit in November -- well below the 14,900 forecast by economists -- and the ONS revised down its October figure to 2,500 from 5,300.

YOUTH UNEMPLOYMENT

Nonetheless, unemployment still looks set to increase further. Recruitment company Manpower's latest survey showed that employers' hiring intentions were the weakest in three years and the government's spending cuts will overall lead to a loss of over 700,000 public sector jobs.

ONS figures showed Wednesday that public sector employment dropped to its lowest level since September 2003 in the third quarter of 2011, falling by 67,000 to 5.987 million.

Unions seized on the figures to slam the government. Instead of attacking pensions and employment rights and making it easier to sack people the government should be pursuing policies to create jobs, said GMB general secretary Paul Kenny.

And a string of dire company news heralded further job losses in the private sector.

Last week, bank HSBC announced it would shed 300 jobs in Britain. Wednesday, travel agency Thomas Cook said it would close 200 of its 1,300 British branches and Anglo-Dutch IT firm Logica announced plans to slash more than 1,300 jobs.

However, Britain's fourth largest grocer Wm Morrison Supermarkets said it will create over 7,000 new jobs in 2012, as it opens 25 new stores and develops its manufacturing and logistics operations.

For 2012, the independent government forecasting unit, the Office for Budget Responsibility, predicts that unemployment will average 8.7 percent over the whole year.

Young people have been hardest hit by the economic slowdown. Youth unemployment rose to 1.027 million, its highest level since records began in 1992.

Wage growth remains muted. Average weekly earnings growth including bonuses slowed to 2.0 percent in the three months to October, down 2.3 percent in September, in line with forecasts.

(Reporting by Sven Egenter and David Milliken)