Britain's government must take bold steps to boost investment, and the Bank of England should drop its resistance to buying company loans in order to get the economy out of recession, the country's largest business lobby said on Friday.

The call by the British Chambers of Commerce (BCC) for sweeping, potentially debt-financed measures to boost growth heaps further pressure on Chancellor George Osborne, who has warned that any fiscal loosening could cost Britain its top credit rating.

The BCC says the government is already set to miss its goal to erase the deficit within five years, as the economy looks likely to shrink this year and a meaningful recovery remains elusive due to the drag from the euro zone debt crisis.

However, a near-term spending boost accompanied by plans to rein in spending on welfare, pensions and public services was possible without losing investors' trust, the BCC said.

Swift action was needed to support business investment, incentivise job creation, and stimulate construction, particularly in the housing sector, the BCC said.

"These measures will have to be funded either by making tough choices within the existing spending envelope, or by using the UK's market credibility to support limited extra borrowing," the lobby group said.

"Business wants a hybrid strategy that delivers both deficit reduction and growth," BCC Director General John Longworth said in a statement. "Politicians need to get some political backbone and show leadership," he added.

The BCC slashed its economic forecast, and now predicts a 0.4 percent decline in gross domestic product in 2012 and only a 1.2 percent increase in 2013 - broadly in line with the consensus in a Reuters poll of economists on August 16, and new forecasts from the Confederation of British Industry on Thursday.

Government borrowing was set to overshoot its target by 14-17 billion pounds every year until 2015, the BCC forecast, and its chief economist, David Kern, said that eliminating the structural current deficit would probably take two to three years longer than envisaged.

"Nevertheless, if the chancellor demonstrates that he remains committed to a firm fiscal plan, policies to boost growth would be consistent with maintaining strong market credibility," he said.

Osborne has already been forced to extend his original timeframe for deficit reduction by two years to 2016/17, and Prime Minister David Cameron has warned the austerity drive could last for the rest of the decade.

LACK OF CONFIDENCE

Britain's ruling coalition of Conservatives and Lib Dems has made deficit reduction the cornerstone of its policy. But calls to ease the austerity plan of spending cuts and tax increases are mounting because the economy slipped into its second recession within four years late in 2011.

Uncertainty about the future of the euro zone has made many businesses reluctant to invest, credit conditions remain tight and households have reined in spending because soaring prices and higher taxes have eaten away meagre wage rises.

A survey showed on Friday that British consumer morale stayed in the doldrums in August as no amount of Olympic cheer seemed able to outweigh fears about the economy.

The central bank is expected to increase its quantitative easing purchases of government bonds in November beyond the 375 billion pounds agreed so far.

But BCC economist Kern warned that such a step would be "misguided". "With yields on gilts at very low levels already, additional QE would provide marginal benefits only for the real economy, while increasing longer-term risks of higher inflation, bubbles and financial distortions," he said.

The MPC could make the current asset purchase programme more effective if, instead of purchasing gilts only, it also bought private sector assets, such as securitised business loans.

The lobby group reiterated its call for a state-backed business bank with a focus on smaller and medium-sized firms.

The BCC said measures that boost the economy's productive potential such as higher investment allowances, cuts to National Insurance contribution, support for construction and house building, infrastructure spending were likely to be accepted by the markets if other cuts were speeded up.

(Editing by Stephen Nisbet)