Britain cut its economic growth forecast on Wednesday and said inflation would remain above target this year and next in a budget that stuck to ambitious deficit-busting goals.

Seeking to support a faltering economy, finance minister George Osborne said corporation tax would be cut by two percentage points to 26 percent from April, rather than by just the one point originally planned.

A levy on banks would be increased to pay for it.

Osborne cut his growth forecasts to 1.7 percent in 2011, and 2.5 percent in 2012, citing figures from the government's independent fiscal watchdog. In November, growth was estimated to be 2.1 percent this year and 2.6 percent in 2012.

Sterling fell to the day's low versus the dollar in response to the new economic forecasts.

The Conservative-Liberal Democrat coalition government is attempting to eliminate most of a deficit of 10 percent of national output before the 2015 election, while also nurturing a fragile economy back to health.

Public borrowing would fall less steeply over the next four years than previously hoped but the bulk of the budget deficit would still be eliminated by 2015, Osborne said.

Policymakers at the Bank of England face a dilemma, with inflation running at more than double their 2 percent target while the economy is still in a fragile state and needs the support of record low interest rates.

Osborne said soaring oil prices meant inflation would remain between 4 and 5 percent this year before dropping to 2.5 percent next year.

UNCERTAIN BACKDROP

The economy unexpectedly shrank at the end of last year and, although it is seen bouncing back this year, the recovery faces headwinds from constrained credit, weak household finances, high oil prices and the prospect of tighter monetary policy.

Minutes of this month's Bank of England monetary policy meeting on Wednesday showed no more policymakers had joined the camp wanting to raise interest rates, with three out of nine MPC members backing a hike and the rest wanting to hold rates at a record low of 0.5 percent.

Markets have been betting that the BoE could start to raise rates in the coming months, potentially creating a headache for a government banking on loose monetary policy to support the recovery while it slashes spending. Any delay will be a welcome relief for Osborne and his team.

The coalition -- which set four-year plan to cut public spending by about a fifth last year -- has little cash to spend to ease the pain for struggling businesses and families.

Labour, the unions and some economists argue the government is putting the recovery at risk by cutting the deficit so fast.

The wisdom of the government's harsh four-year spending review has also been brought into question for other reasons.

British fighter jets are now operating in Libyan skies to quell attacks by Muammar Gaddafi on his own people, but any sustained military engagement could put Britain's cash-strapped armed forces under strain.

(Editing by Mike Peacock)

United kingdom Target Inflation