By Fiona Shaikh

LONDON (Reuters) - The Bank of England could slash interest rates to their lowest in more than half a century later on Thursday amid mounting evidence the rapidly sinking economy may be heading for a full-blown depression.

Policymakers had already discussed slicing more than 200 basis points off borrowing costs last month, but opted for a smaller, though still spectacular, 150 basis point reduction to 3 percent because they did not want to spook the markets.

However, a rapid deterioration in business conditions since then has raised fears Britain could be heading for a much deeper downturn than anybody expected, and analysts warn policymakers must act now to ward off the much graver threat of deflation.

Banks have clamped down on lending, choking off the lifeblood to businesses and the housing market, unemployment is soaring and consumer confidence has taken a dive. Stores are slashing prices, desperate to pull in shoppers.

And a survey on Wednesday showed the services sector, which accounts for three-quarters of economic output, contracted at a record rate in November, indicating the economic downturn may have gathered momentum towards the end of this year.

"They need to do something aggressive again, because of where the data's been taking us," said George Buckley, chief UK economist at Deutsche Bank, who sees a 100 basis point cut on Thursday, with a risk of a 150 basis point reduction.

"Is it better to cut rates gradually, or take them down to a very low level very quickly, because that's going to have a much larger impact over a longer period of time?"

A Reuters poll this week reflected that view, with 40 out of 62 economists expecting a full one percentage point cut to 2 percent.  Continued...