Scotland's financial sector, increasingly central to the country's economy in recent years, is heading for a severe contraction that could see thousands of staff lose their jobs.

Business forecasters and experts said that the sector, which employs about 80,000 people directly with another 100,000 in the support sector, will be especially badly hit.

The proposed takeover of HBOS by Lloyds TSB and the weakness of the Royal Bank of Scotland, following the £37 billion bank bailout by the Government, will see bank branches closing in Scotland's high streets, with a knock-on effect as other companies in the sector trim their operations.

The gloomy predictions about Scotland's financial services, the biggest such sector in the UK outside London, came as new jobless figures showed an 18 per cent rise in unemployment north of the Border in the June-August quarter, up from 105,000 in the previous quarter to 124,000.

In the UK the total number of people out of work is expected to rise to 3million within two years after figures yesterday showed that unemployment rose at its fastest rate in 17 years in the three months to August. Numbers out of work soared by 164,000 to 1.79 million in the three months to August on the Government's preferred Labour Force Survey gauge of unemployment.

The jump in the jobless count came as a stark warning to the Government that, despite international praise for its bank bailout plan, clear signs of recession are now emerging.

David Blanchflower, a member of the Bank of England's rate-setting committee, said in an interview yesterday that the figure could rise to more than 2million by Christmas. Vicky Redwood, of Capital Economics, the consultancy, gave an even gloomier forecast. “We expect the measure to rise by a total of 1.5million to around 3million by the end of 2010,” she said.

In Scotland, such is the scale of the crisis facing both financial services and the construction industry that there is unanimity among experts that the worst is still to come over the next year to 18 months.

The International Labour Force Survey for Scotland showed that there were 10,000 fewer people in work, compared with the same period in 2007. Overall, the Scottish unemployment rate rose by 0.7 per cent over the quarter, to 4.7 per cent, well below the UK average of 5.7 per cent.

Richard Harris, director of the Centre for Public Policy for the Regions, based at Strathclyde and Glasgow universities, said: “In the last two quarters the unemployment rate in Scotland has not risen in a comparative way to the UK as a whole, but that is going to change.”

Mr Harris cautioned that the public sector could also fall victim to the tightening of public spending as the Scottish government at Holyrood seeks efficiencies across all tiers of government. “Scotland is going to experience a much bigger jobs decline than expected,” he said.

Jim Murphy, the Scottish Secretary, pledged that the UK Government's priority was to help people back into sustainable employment quickly. “We will use every method at our disposal to make that happen,” he said.

John Swinney, the SNP Finance Secretary at Holyrood, said: “There must now be measures by the UK Government to reflate the wider economy.”

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