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"Lehman's collapse also increases concerns that other banks could fail", Howard Archer, Global Insight's chief economist for Britain and Europe, said in an e-mail message. "As a result, banks are likely to become even more reluctant to lend to each other, thereby increasing the risk that the credit crunch will deepen and last for some considerable time to come."

Lehman Brothers said Monday it would seek Chapter 11 bankruptcy protection after being unable to secure a buyer or assistance from the U.S. federal government.

The U.S. investment firm's collapse will increase risks to growth in Britain and the eurozone, Archer said, heightening the danger of recession.

European Central Bank and the Central Bank of England said they would monitor the situation and step in if necessary.

"The form and extent of further Central Bank action will clearly be determined by how serious they perceive the fallout from Lehman Brothers' collapse is and what happens in the financial markets", Archer said. "It could ultimately lead to earlier-than-expected interest rate cuts by the Bank of England and the European Central Bank."

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