Banks have been ordered to inject more cash into small firms amid claims the UK is now officially in recession.

The Government said a key condition of its multi-billion pound banking bailout was a resumption of lending to small businesses.

John Denham, Secretary of State for Innovation, Universities and Skills, told KentOnline that recapitalisation of the banks "came with strings."

"As part of the deal to support the banks, they have been required to promise that they will maintain lending to small businesses at the same value as in 2007," he said. "Central Government recognises the need to get money into small business."

He added: "We’re not running the banks from Whitehall but the banks are not going to be able to take money in from the taxpayer and then start taking all that money back out of the small business sector."

However, small business groups remain sceptical. Andrew Aves, regional organiser for the Federation of Small Business in Kent and Medway, said there was no evidence of banks letting go of the purse-strings in the past two weeks. Firms relying on long-term overdrafts were seeing their funding cut.

Insolvency expert Steve Tancock, of Maidstone-based Smith & Williamson, said the number of Kent firms in financial difficulty was rising and would continue to rise because of weak cashflow and the reluctance of banks to lend.

Meanwhile, the Ernst & Young ITEM club, which uses the Treasury’s own model for its prediction, said the economy had deteriorated dramatically in the last quarter and "is now in recession.."

ITEM is forecasting that the economy will contract for three further quarters before bottoming out in the second half of next year and expects a weak recovery in 2010. It said GDP will fall by one per cent next year, the first year of negative growth since 1992.

It is predicting that UK unemployment, which has gone up in Kent and Medway by 1,800 in the past two months, could hit 2.3 million by the end of next year. And house prices will fall by 14 per cent this year, and a further 10 per cent in 2009.

Peter Spencer, chief economist to the ITEM club, said: "Gordon Brown may have won plaudits for stopping the systemic meltdown of the banking system over the last few days.

"But, we now have to face up to the reality of an economy that has been seriously weakened by recent dramatic events. The effects of the credit crisis are spreading out from the financial and housing sectors and impacting every part of our domestic economy."