Government bond prices slumped and the pound tumbled yesterday as investors blanched at the speed at which Britain’s finances have deteriorated.

Within minutes of the Chancellor sitting down, dealers fled government bonds as the Treasury’s borrowing arm, the Debt Management Office (DMO), said that it would have to tap investors for £220 billion this year.

Shahid Ikram, head of sovereign products at Aviva Investors, said: “It’s massively worse than expected.”

It is through the sale of government bonds — gilts — that the Treasury funds its burgeoning debt.

The need for extra government borrowing was much more urgent than most City analysts had expected.

The median forecast was for £180 billion this year. The DMO had predicted only last month that it would have to raise £148 billion.

Moyeen Islam, a fixed-income strategist with Barclays Capital, said that the Government’s cash requirement for the next five years was £208 billion more than Alistair Darling’s estimate five months ago.

“That’s pretty startling, given his fairly rosy growth outlook of 3.5 per cent from 2011-12,” he said.

The June gilt future — a widely used measure of government bond prices — slid by 0.84 points to 121.67.

Yields on medium maturity gilts rose by 0.15 per cent, a substantial change.

The pound fell 1 per cent against the dollar to $1.4515 and weakened against the euro, with €1 now costing 89.73p.

John Hardy, a currency analyst with Saxo Bank, said that the Budget had poured cold water on sterling’s recent rally.

“It reminded the market of the dire fiscal position of the UK Government, which is expanding its spending even as tax revenues collapse,” he said.

The adverse market reaction means that the Government may have to promise a higher interest rate on future borrowings to attract lenders — bond buyers.

A failed auction of gilts last month sent shockwaves through the bond market, raising fears that investors were losing interest in government bonds.

Without a keen appetite for its debt, the Government may struggle to raise the huge sums required to meet its spending plans. It would also mean higher taxes to finance the greater interest bill.

Robert Stheeman, chief executive of the DMO, conceded the possibility of more failed bond auctions but said that the weakness of sterling should make the bonds more attractive to foreign investors.

“We’re confident we’ll be able to sell this,” he said. Foreigners own about a third of government bonds.

Demand for government bonds has been mostly strong, partly underpinned by the Bank of England, which became a big purchaser through its quantitative easing programme.

The DMO said that £30 billion of the new bonds to be issued this year would be inflation-protected or index-linked.

Mr Darling left the City in no doubt of the scale of borrowing to come: £175 billion this financial year and £173 billion, £140 billion, £118 billion and £97 billion respectively in the following four financial years.

As a proportion of national output, government debt would climb from 59 per cent this year to a peak of 79 per cent in 2013-14.

Gordon Brown used to regard 40 per cent as the absolute maximum.

Analysts are worried that the Government still has huge borrowing plans despite predicting a dramatic economic recovery the year after next.

If that proves overoptimistic, tax revenues would be less buoyant and borrowings, or spending cuts, would have to be greater still.

On top of its planned bonanza of gilt sales, the Government also plans to raise an additional £21.6 billion through new issues of Treasury bills, essentially short-term IOUs.