BRUSSELS : European central banks led a new drive against recession on Thursday with dramatic rate cuts and France rolled out huge extra spending to support an EU crisis package as stocks surged but sterling sank.

With deflation replacing inflation as the main threat on top of spreading recession, the European Central Bank hacked back its key eurozone rate by three-quarters of a point to 2.50 percent.

This was the biggest cut ever made by the ECB and the aggressive scale of the move surprised experts who had expected a smaller reduction.

The Bank of England cut by one point to 2.0 percent, the lowest since World War II, and the Swedish bank by 1.75 points to 2.0 percent.

As the central banks slashed their way towards the bottom of the interest-rate ammunition locker, a string of data faced global policymakers with ever more hostile economic conditions and distress.

EU figures bore out an initial estimate that the eurozone is in its first recession, shrinking by 0.2 percent in each of the last two quarters.

The US Federal Reserve central bank had reported earlier: “Overall economic activity weakened across all Federal Reserve districts since the last report.” Consumer spending was weak and auto sales were “down significantly.”

British house prices slumped by a record 14.9 percent in the last three months and British car sales by a 28-year record of 36.8 percent in November on a 12-month comparison.

This was the latest in a string of bad figures for European manufacturers, several of which have suspended some production, and the head of the British SMMT auto trade association Paul Everitt called for “urgent action” to raise credit for the industry and its customers.

The impact of the credit crisis is wrecking the global auto industry, and the big three distressed US auto makers were returning cap in hand to Congress on Thursday to plead for 34 billion dollars of state rescue funding to help them restructure.

In France, where official data showed the unemployment rate rising by 0.1 points to 7.3 percent in the third quarter, President Nicolas Sarkozy unveiled a massive stimulus plan worth 26 billion euros (33 billion dollars).

“Our answer to the crisis is a massive investment drive, because that is the best way to support businesses and to protect jobs,” Sarkozy said.

“We cannot be content with simply limiting the damage. We need to be ambitious, bold, imaginative.”

France’s contribution to a European-wide economic stimulus drive expected total up to 200 billion euros, the plan combines infrastructure projects with action to improve cashflow for businesses and protect jobs.

The package includes 1.5 billion euros to help the auto industry, which provides jobs for 10 percent of the workforce, including incentives to scrap an old car and buy a new one.

The Swedish central bank revealed the struggle central bankers are having in smashing the credit dam: “The fact that the interest rate needs to be cut substantially is also due to monetary policy not having such a large impact recently as it normally does.”

However, Jennifer McKeown of Capital Economics, saw some cause for optimism in the eurozone data: “There are still reasons to hope that the downturn in the eurozone will be shorter-lived than those elsewhere,” she said, but also forecast the bloc’s economy would shrink by 1.0 percent in 2009.

Sterling fell to a record low point against the euro of 1.1499 euros and the euro fell to 1.2606 dollars. The benchmark price of oil lost 63 cents to reach 46.16 dollars a barrel, the lowest level for nearly four years.

In Russia, where the ruble has been badly battered by the crisis recently, Prime Minister Vladimir Putin warned: “We must be prepared morally, organisationally, financially and even politically” to overcome the crisis.

With policymakers also turning their attention to reforms needed to tighten up practices on capital markets, the Swiss federal banking commission said its two biggest banks UBS and Credit Suisse, reeling from losses, had agreed to strengthen their capital bases.

As central banks moved to slash rates, European shares rallied strongly in a range of two to three percent.

Shares in Asia had closed mixed with a fall of 0.62 percent in Tokyo and 1.23 percent in South Korea, although the Hong Kong market gained 0.67 percent and the Shanghai market 3.63 percent.

US Treasury Secretary Henry Paulson said after a top-level meeting in Beijing that the talks were marked by a spirit of cooperation on the global crisis.

And vice Premier Wang Qishan said: “Jointly dealing with the international crisis is the most pressing task we are now facing.”

But a senior US government official said, referring to US pressure for a rise of the yuan: “We certainly emphasised the importance in our view of continued currency reform, and that currency reform is important for continuing to re-balance China’s economy.”

The psychological effects are also reaching deep. The union head of the US United Auto Workers, Ron Gettelfinger, said his organisation was ready to suspend some contractual rights.

“Concessions, I used to cringe at that word,” he said. “But now, why hide it?”

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