Unemployment is poised to fall through the magic million mark for the first time in a quarter of a century after figures yesterday showed another sharp drop in the jobless total.

Unemployment is poised to fall through the magic million mark for the first time in a quarter of a century after figures yesterday showed another sharp drop in the jobless total.

The number of people out of work and claiming benefit dipped by 16,400 to 1.035 million in September. At its current rate it will hit the politically-sensitive landmark by Christmas.

The last time there were less than a million people unemployed in Britain was in December 1975. The Government hailed the achievement as a result of its policies, but economists in the City warned there were signs Britain was fast running out of spare workers.

The International Labour Organisation (ILO) unemployment rate, which the Government believes is more accurate, fell from 5.6 to 5.3 per cent - its lowest since records began.

David Blunkett, the Employment Secretary, said: "The fall in ILO unemployment is further confirmation that our policies are working." No Opposition spokesman was available to comment.

The figures, published by the Office for National Statistics, showed 27.99 million people in work - also an all-time record.

Despite massive demand for new workers by businesses, pay levels showed little sign of surging upwards. Over the year to August, average earnings rose by 3.9 per cent, the same as in July, and down from a peak of 6 per cent in February.

But some labour market experts doubt whether the UK will be able to continue to deliver the holy grail of falling unemployment and low wage inflation. The official figures showed the number of unfilled vacancies at jobcentres standing at a record high of 368,000. If, as economists believe, this measures only a third of the actual total, it would mean the UK is already enjoying full employment, with 1.03 million out of work and 1.1 million vacancies.

The Bank of England, which sets interest rates, warned that the labour market needed to be "monitored very carefully". Neil Parker, UK economist at the Royal Bank of Scotland, said the fall in unemployment could force interest rates up. "The likelihood that the claimant count will fall below a million should worry [the Bank] as it will continue to put pressure on wage claims."

The main worry for businesses is a growing shortage of skilled workers. A survey by Reed, the recruitment specialists, showed almost three-quarters of UK companies suffer from skills shortages.

The Government has already proposed relaxing immigration regulations to help ease the problem. Under the proposed new rules, workers would be allowed to seek work in the UK rather than having to wait for a prospective employer to obtain a work permit first.

James Reed, chief executive of Reed, said: "If Britain is to be globally competitive it is vital to be able to attract the best talent from around the globe."