Frankfurt - The euro plunged to a three-year low Friday, slipping below 1.26 dollars, amid forecasts that a sharp global economic slowdown and dwindling inflation will result in the European Central Bank (ECB) cutting interest rates again this year.

In July, the common currency, which was launched in January 1999, hit a record high of more than 1.60 dollars.

Since then, however, fears have grown that the 15-member eurozone was edging its way towards recession.

Combined with weeks of drops in commodity and energy prices, the slowing world economy has helped to undercut inflationary pressures, giving the ECB room to follow up this month's hefty 50-basis points rate cut.

"The risks remain of further losses for the currency (euro)," said Ralf Umlauf, currency analyst with the Hesse-Thuringia state bank.

Indeed, the dollar appears to be staging something of a comeback against leading European currencies on expectations the giant US economy will be able to mount a faster recovery from the slowdown than Europe.

Moreover, next week could be another test for the euro, with the release of a slew of key sentiment indicators from the European Union and Germany, Europe's biggest economy.

German business confidence is tipped to fall again in October after a survey released this week showed morale in French boardrooms plummeting to a 15-year low. By late afternoon, the euro was trading at 1.2645 dollars.

The ECB cut the cost of money this month by 50 basis points to 3.75 per cent as part of a coordinated action by the world's leading central banks to shore up economic and investor confidence in the face of a global share sell-off sparked by recession fears.

Analysts also predict that the EU's statistics office will report next week that annual eurozone inflation slipped to 3.3 per cent in October, from 3.6 per cent in November.

That would still be substantially more than the ECB's annual inflation target of close to, but under, 2 per cent. But economists are expecting the pace of eurozone rate cuts to pick up speed in the coming months, through to the middle of next year, as the ECB reacts to contracting economic growth.

A similar picture has emerged across the channel in Britain with the Bank of England also expected to trim rates amid evidence that growth in the UK is slumping dramatically.

Data released Friday showed the British economy contracting for the first time in 16 years in the third quarter, adding to evidence that the nation is heading into recession.

The British economy shrank by a more-than-forecast 0.5 per cent during the three months to the end of September, the official figures said.

Apart from sending shares in London into a tailspin, signs that the British economy was on the brink of a major slump resulted in the pound chalking up its biggest fall in 37 years to drop below 1.53 dollars.