LONDON (Reuters) — The outlook for the British economy has worsened in recent weeks and there is a substantial risk inflation could fall below one percent next year, Bank of England Governor Mervyn King said yesterday.

Earlier, official data showed British inflation fell to 4.1 percent in November from 4.5 percent, still more than double the central bank's target and requiring King to explain why to the government in an open letter.

In his letter, King said a cut in sales tax, falling commodity prices and a weak economy would force inflation sharply lower soon and it was quite possible he would soon have to explain why inflation was so far below target.

The slide in the pound and falling market interest rates would, however, provide support to both the economy and inflation, he added.

His comments reinforced market expectations that the BoE will deliver more aggressive interest rate cuts in the coming months, having slashed rates by three percentage points to two percent since October, to stave off a deep and prolonged recession.

"Our forecast remains that the UK Bank Rate will fall below one percent in the second quarter of next year," said Philip Shaw, chief economist at Investec.

King is required to write an open letter to government when consumer price inflation deviates by more than one percentage point from the target to explain what the central bank intends to do to bring it back on track.

King first wrote to Darling in June when official data showed inflation spiked above three percent. Under the BoE's remit, subsequent letters are only required every three months if inflation holds above target throughout that period.

"It is possible that I will not need to write a further open letter to you in three months time," King told Darling.

"Indeed, given the short-term outlook for inflation, it is quite possible that I will next need to write to you to explain why inflation has deviated by more than one percentage point below the target during 2009."

King's comments on the pound expressed little concern about sterling's recent dive, instead emphasising the likely positive effect on growth.

Economists have had to regularly amend their forecasts for Britain in recent weeks to account for an unrelenting barrage of grim data. Having shrunk by 0.5 percent in the third quarter, the economy is now expected to contract well into next year.

And worries over inflation, which earlier this year were rivalling concerns over economic growth, have been replaced with the spectre of deflation.

"The UK is still in the very early stages of what is going to be a very steep decline in inflation that will see both CPI and RPI in negative territory for much of 2009," said Shaw. The ONS said the biggest downward effect on CPI came from transport costs which knocked 0.45 percentage points off the annual rate as fuel prices fell sharply.

The main upward effect came from food prices as fruit inflation doubled to 10.8 percent, possibly because of the weaker exchange rate as most fruit in Britain is imported, especially at this time year.

The pound hit a record low against the euro this week but King's comments suggest that policymakers are nonchalant about the decline, and if anything welcome it.

The ONS said retail price inflation, on which many wage deals are based, fell to three percent — the weakest rate since May 2006.