The Bank of England today cut interest rates by 1.5% in its most dramatic attempt yet to rescue an economy on the brink of recession.

The unexpectedly large cut brings official interest rates to 3% and was immediately welcomed by business leaders.

The move from the Bank's Monetary Policy Committee (MPC) comes as the UK sinks further into economic gloom.

Asked if a cut would be passed on to borrowers, the Prime Minister Gordon Brown told the House of Commons yesterday:

"We want the banks and building societies to pass on the interest rate cuts to their mortgage holders.

"What we've been trying to do over the last few weeks is get the liquidity into the system, recapitalise our banks and then get them to resume the lending that is necessary."

Lloyds TSB has confirmed it will be passing on the full 1.5% cut in interest rates to its variable rate mortgage customers.

The group, which also lends under the Cheltenham & Gloucester brand, is reducing its standard variable mortgage rate (SVR) from 6.5% to 5% from November 1.

But other lenders were slower to respond, with all of the major groups, including the UK's biggest lender Halifax, saying their rates were under review.

Lloyds TSB pledges that its standard variable rate (SVR) will never be more than 2% above the Bank of England base rate, leaving it little option but to cut it.

But many other lenders are expected not to pass on the full reduction to their SVR customers, particularly given the size of the cut.

Only 57 of the 96 lenders that have an SVR have passed on October's reduction, with many failing to pass on all of the 0.5%.

Most of the 4.7 million households which have a tracker or discount mortgage should automatically benefit from the reduction.

But new borrowers taking out one of the deals are unlikely to see their rates fall in line with today's cut.

Lloyds TSB and nationalised bank Northern Rock pulled their entire tracker ranges yesterday to reprice them.

Abbey and Halifax also increased rates on some of their tracker products by up to 0.5% last week, effectively wiping out a third of today's cut, while Nationwide hiked the cost of some of its deals by up to 0.4%

The problem for lenders is that wholesale funding costs remain high in relation to the base rate.

The key inter-bank lending rate, three-month Libor, fell to 5.56% today, but it remains a massive 2.56% above the new base rate, and well up on its typical pre-credit crunch range of between 0.15% and 0.2% higher.

A Council of Mortgage Lenders spokeswoman said: "The real cost of funds to lenders is determined not by the Bank base rate, but by their own cost of borrowing.

"So it does not make commercial sense to insist or expect that lenders automatically 'pass on' cuts in Bank rate to borrowers, other than those with Bank rate tracker mortgages, unless and until the cut flows through to an equivalent reduction in their own funding costs."

If mortgage lenders do pass on the 1.5% cut in full, it would slash the monthly cost of a typical £150,000 mortgage by £138 to £887, based on a new rate of 6%.

People who are heavily mortgaged with a £250,000 loan would see their repayments drop by £230 a month, or £2,757 a year.