'We may not have come to the end of recapitalization,' Mr King told a Treasury committee. 'We should not shy away from that if that proves to be necessary.' 'The single biggest challenge is to get the banking system to resume lending,' he added.

The government has already committed 37 billion pounds (S$84.15 billion) to recapitalise three of Britain's largest banks.

Mr King also gave his approval to the government's pre-budget report, which Treasury head Alistair Darling announced on Monday.

In the report, Mr Darling unveiled a package of 20 billion pounds of fiscal stimulus measures - which amounts to around 1 percent of Britain's gross domestic product. The package included some tax cuts, increases in tax credits and welfare payments, and the bringing forward of 3 billion pounds of capital spending planned for 2010 to now.

Mr King said the 'extraordinary circumstances' meant a fiscal stimulus package was 'perfectly reasonable and appropriate,' as long as it was temporary and came with a clear path back to fiscal sustainability.

He told the Treasury committee: 'I think the announcements made yesterday met those two conditions, but of course the proof of the pudding, in terms of ensuring that we go back to fiscal sustainability, will be in the eating.'

However, Mr King also warned that, as a result of the fiscal stimulus package, it was now likely that Britain would suffer from negative inflation - or deflation - next year.

But, on the positive side, Mr King predicted that if deflation did occur, it would be short-lived and the country would avoid falling into a recessionary spiral, in which prices decline continually over a sustained period of time and damage the possibility for economic growth.

'I do not think we feel that is the position we are in or likely to be in because the likely duration of the period in which the measured inflation rate is negative is likely to pretty short,' he said. -- AP