LONDON (Reuters) - British manufacturers hiked prices in June at the fastest annual pace in at least two decades to combat record cost inflation, underlining the dilemma facing the Bank of England (BoE) as the economy slows but prices jump.

Investors took some comfort from weaker than expected monthly rises in input prices and core output prices - but economists said it was far too early to argue that inflation was about to cool enough to make way for interest rate cuts.

"Ongoing elevated inflationary pressures continue to constrain the Bank of England's ability to deliver any time soon the interest rate cuts that the economy so badly needs," said Howard Archer, an economist at Global Insight.

The Office for National Statistics (ONS) said that output prices rose 0.9 percent on the month in June, taking the annual rate up to 10 percent - the highest since the data series began in 1986.

Input prices rose a seasonally adjusted 2.1 percent, taking the annual rate up to 30 percent - also the highest since 1986 as food and fuel prices rocketed.

"Another poor set of producer prices data," said Geoffrey Dicks, an economist at RBS. "With oil prices hitting new highs, we are still not at the peak in terms of the annual inflation rate."

Fears of a marked slowdown in the economy and a possible housing market crash have led many analysts to argue the BoE will have to lower interest rates eventually, but those cuts will be hard to justify with price pressures building so fast.

Data today is likely to show another rise in consumer price inflation, already running at the highest rate in more than a decade at 3.3 percent. In any other environment, interest rates would be heading higher.

Nonetheless, BoE policymaker Kate Barker said in a newspaper interview that the central bank needed to be careful about keeping rates so high that the economy slowed too much.

Policymakers argue that a weakening economy should help tame inflation, but also worry that too sharp a slowdown will actually drive inflation below its two percent target.

"The mistake we could make, and we are all worried about this, is of holding policy too tight, and the economy weakening more than is necessary to get inflation back on target," Ms Barker told the Times newspaper yesterday.

"The worst mistake we could make, very clearly, is to allow inflation to get out of control."

However, markets appeared to focus on the only bright spot in June's producer prices data - a smaller than expected rise of 0.3 percent in core output prices on the month which provided some support to interest rate futures and knocked sterling.

That was the weakest rate of increase since November 2007 and below expectations for a rise of 0.8 percent.

The ONS said this was because scrap metal prices had remained broadly steady after surging higher in previous months.

"If the month-on-month change in core output prices is symptomatic of a slowdown in inflation pressures then that is good news," said Philip Shaw, an economist at Investec.

"But it's far too early to read that into the data." The annual rate of core output price inflation, however, jumped to 6.3 percent - the fastest since April 1982.