George Osborne is under fresh pressure to ease his austerity measures after shock figures revealed the economy suffered a worse-than-expected 0.7% decline between April and June.
Dire construction and manufacturing output drove the biggest drop in GDP since the height of the financial crisis three years ago. Forecasters had expected a much smaller 0.2% fall.
It is the third quarter in a row that the economy has contracted, meaning the UK is now mired in the longest double-dip recession since quarterly records began in 1955 - and possibly since the Second World War.
An extra bank holiday for the Queen's Diamond Jubilee and record rainfall played a significant part in the biggest slump since the height of the financial crisis three years ago, said the Office for National Statistics (ONS).
Economists said the figures were a symptom of underlying weakness, with one branding the second quarter of 2012 a "disaster".
Labour and the unions seized on the figures as fresh evidence that the painful austerity measures are choking off the recovery, but a defiant Mr Osborne said the UK is battling "deep-rooted economic problems".
The UK's economy is 0.3% smaller than when the coalition came to power in the second quarter of 2010, the ONS figures showed, and is still 4.5% lower than its 2008 peak.
Of particular concern was a 5.2% decline in construction, while manufacturing also suffered hefty falls as its main export markets were hit by the eurozone debt crisis.
The pound fell against the euro as the data increased chances that the Bank of England will pump more money into the economy or drop interest rates further. Shadow chancellor Ed Balls said: "If these figures don't make the Chancellor wake up and change course, then I don't know what will."
TUC general secretary Brendan Barber said: "The Government's austerity strategy is failing so spectacularly that it has wiped out the recovery completely."
Mr Osborne hit back, saying: "We're dealing with our debts at home and the debt crisis abroad.
"We've made progress over the last two years in cutting the deficit by 25% and businesses have created over 800,000 new jobs.
"But given what's happening in the world, we need a relentless focus on the economy."
But many economists have questioned the ONS's figures, saying they are at odds with industry surveys and jobs figures, which have been much more upbeat.
Bank of England governor Sir Mervyn King (below) has warned the economy will "zig-zag" this year as special events such as the Jubilee and the Olympics create erratic trends.
A CBI survey seemed to contradict ONS figures.
It showed that output in manufacturing was steady in the three months to July.
Vicky Redwood, chief UK economist at Capital Economics, added it would take "pretty hefty revisions" to make recent performance look even half decent.
And she added that: "Even allowing for a decent bounce-back in the third quarter, we still expect the economy to contract by about 0.5% this year and to grow by only 0.5% in 2013."
The IMF recently reduced its UK forecast for 2012 to just 0.2%, and it expects growth of 1.4% the next year.