By Sven Egenter and Keith Weir

LONDON (Reuters) - Britain's economic prospects are deteriorating so swiftly that the Bank of England on Wednesday signaled it was on the verge of pumping in more money to support growth, potentially as soon as October.

Minutes from the Bank's September meeting showed most policymakers believed the stresses of the past month had strengthened the case for an "immediate" return to the policy of quantitative easing.

The International Monetary Fund warned on Tuesday that Europe and the United States could slip back into recession unless economic problems aren't tackled quickly, and the IMF also slashed its growth forecasts for Britain.

Action to support the economy would provide some relief to the Conservative-led coalition after figures showed higher government spending and weak tax receipts drove the deficit to a record high for a month of August.

Treasury minister Danny Alexander insisted that the government was sticking to its plans to erase the large budget deficit after reports that ministers were looking at investing an extra five billion pounds on capital projects to ward off fears the economy could fall back into recession.

With interest rates at a record low of 0.5 percent, attention is focusing on whether the Bank of England will revive its program of asset purchases after spending 200 billion pounds in 2009-10, mainly on buying gilts, to help drive down borrowing costs for businesses and boost confidence.

BoE chief economist Spencer Dale, who dropped his call for higher rates only in August, said in a speech the outlook for the economy had weakened materially over the past few months.

"If the economic situation continues to deteriorate, some additional loosening in monetary policy might be needed," he said.

Any decision on more stimulus had to be weighed against high inflation, which was expected to top 5 percent later this year, Dale said, though he noted that inflation was set to fall back quite materially next year.

STRESSES

At September's meeting, arch-dove Adam Posen remained the only one to vote for an additional 50 billion pound in asset purchases.

But the minutes showed that most members of the Monetary Policy Committee thought it was increasingly likely that more asset purchases would become warranted at some point.

"For most members, the decision of whether to embark on further monetary easing at this meeting was finely balanced since the weakness and stresses of the past month had significantly strengthened the case for an immediate resumption of asset purchases," the minutes said.

"For some members, a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase program at a subsequent meeting."

Sterling fell to an eight-month low against the dollar, while gilts rose after the minutes were published.

The minutes said that those voting for an unchanged policy in September had seen some merit in waiting to see how actions taken by overseas authorities would develop.

The Bank said earlier this week in its quarterly bulletin that the first round of asset purchases gave the economy a significant boost during the recession.

Policymakers also discussed other policy options, including cutting its main interest rate and giving explicit guidance on the future path of rates. However, they concluded that none of these options appeared to be preferable to further asset purchases at the moment.

AUTUMN ACTION

Since the September meeting, a string of bad news from the economy, the euro zone debt crisis and rising tensions in financial markets have stoked recession fears in Britain.

Business Secretary Vince Cable, a member of the Liberal Democrat junior coalition partner, has backed calls for more quantitative easing to help the economy.

Economists said it was now a question of when, not if, the Bank would move.

"The minutes of the September MPC meeting are appreciably more dovish, opening the door wide to more quantitative easing by the Bank of England and very possibly sooner rather than later," said Howard Archer, of IHS Global Insight.

"Barring a marked improvement in the economy over the next few weeks (which is currently hard to see), we expect the MPC to approve a further 50 billion pounds in quantitative easing during the fourth quarter," he added.

"A move as soon as October is entirely possible, but we suspect November is more likely."

The Bank will publish its latest quarterly inflation report in November and changes to policy often come in the same month as these reports are produced.

The IMF slashed its growth forecast for Britain to 1.1 percent for 2011 and 1.6 percent for next year.

It is currently running at 4.5 percent, more than double its target, and the Bank itself says it is likely to top five percent before coming down next year.

(Additional reporting by Fiona Shaikh, David Milliken and Matt Falloon; editing by Patrick Graham)