LONDON (MarketWatch) -- British gross domestic product shrank more than expected in the second quarter, casting doubt on hopes the economy would return to growth in 2009.

GDP shrank by 0.8% in the second quarter, the Office for National Statistics said, in a preliminary estimate. Compared to the same period last year, output fell by 5.6% -- the largest annual decline since current records began in 1955, the ONS said.

Economists surveyed by Dow Jones Newswires had produced a consensus forecast for a 0.3% quarterly decline and a 5.2% year-on-year fall.

"This is a massive setback for hopes that the U.K. economy could see growth again by the end of the year," said Jane Foley, research director at Forex.com.

And since Britain is the first G7 country to report second-quarter GDP, the data is also likely to make investors more cautious in the run-up to GDP reports from other major economies, she said

The data capped a recent climb by the British pound, sending sterling lower versus the dollar and the euro. The pound traded at $1.6447 versus the dollar, a decline of 0.2%. The euro bought 86.51 pence, up 0.8%.

The figures underscore the possibility that the Bank of England could still move to expand its 125 billion pound ($205 billion) asset-purchase facility, economists said. Bank policy makers earlier this month held off on a decision on whether to expand the quantitative-easing program to the full 150 billion pounds authorized by the Treasury.

An expansion of the program, which aims to boost the money supply and boost nominal spending in the economy, is seen as negative for sterling.

"A bad number and potentially one reason to suspect that the risk of expansion in the APF is still alive," wrote Alan Clarke, an economist at BNP Paribas, in a research note.

The data also pile more doubt on the British government's growth forecasts. The Treasury has projected a contraction of 3.25% and 3.75% in 2009.

"For this to now happen would require a remarkable bounce back in the second half of the year with growth of around 1.5% in each of the remaining two quarters," said Richard Snook, senior economist at the Center for Economic and Business Research.

Weaker growth will also make it likely that net borrowing will exceed the government's 175 billion pound projection for the 2009-10 fiscal year, he said.

London's FTSE 100 stock index remained slightly higher, showing little impact from the data.See London Markets.

GDP has contracted for five consecutive quarters, with output shrinking by a total of 5.7% since the start of the period. GDP saw a quarterly contraction of 2.4% in the first three months of the year.

The decline was broad-based. The services sector, which makes up around three-quarters of GDP, saw a 0.6% drop in output, the ONS said, while production industries saw a 0.7% decline, and manufacturing output fell 0.3%.