STIRLING, Scotland (Reuters) - The British economy needs a massive fiscal stimulus of as much as £90 billion to stop unemployment hitting 10 percent this year, Bank of England arch dove David Blanchflower said.

Stepping well away from the traditional rhetoric of the Monetary Policy Committee, who shy away from talking about government policy, Blanchflower said more fiscal action was needed now because monetary policy was losing its edge.

"There should be a substantial short-term fiscal stimulus focused on jobs," US-based labour expert Blanchflower said in a speech in central Scotland.

"If we use the metric of the (US President Barack) Obama package, that would imply a fiscal stimulus in the UK of around £90 billion which would translate to creating 750,000 jobs. This number is a good starting point for discussion."

Blanchflower, who leaves the MPC at the end of May after turning down a second term, said even if the BoE resorts to boosting the money supply by buying assets with newly-created money that may not be enough to quickly boost lending.

The BoE has slashed interest rates to a record low of one percent from five percent in October and is expected to start a programme of quantitative easing to kickstart demand in the economy because further rate cuts may not work.

"The risks of a protracted recession are clearly evident," he said. "It may take longer than expected for policy initiatives to restore normal lending conditions in financial markets."

The BoE currently forecasts a sharp downturn in the first half of this year before the economy starts to recover at the end of 2009 as its rate cuts and the government's current £20 billion ($29 billion) fiscal boost feed through.

"The risks to the central projection are clearly weighted to the downside," Blanchflower said. The economy shrank 1.5 percent in the three months to December 2008, its sharpest rate of decline since 1980, and most economists expect the downturn to persist through this year.

Blanchflower spent most of last year trying in vain to persuade the MPC to cut interest rates to stave off a sharp recession, but his colleagues were more worried about the long-term impact on the economy from persistent inflation.

"Clearly policymakers did not come to a realisation of the problems in the financial sector quickly enough," he said.

The inflation threat has now all but disappeared. Blanchflower said falling commodity prices and widening spare capacity would push down inflation and the MPC needed to "consider the risk that the UK may experience deflation".

That raised doubts about the BoE's remit to target CPI (consumer price index) inflation because it does not factor in housing costs.

Blanchflower warned that the recession could leave one in 10 Britons out of work by the end of this year — perhaps topping three million people by 2010 — making further support for the economy a matter of urgency.

In the three months to December, the number of Britons out of work rose by 146,000 to 1.971 million, taking the rate up to 6.3 percent — its highest since 1998.

"Unemployment has undeniably adverse effects on those unfortunate to experience it," he said. "Unemployment while young creates permanent scars rather than temporary blemishes."