* Bank of England leaves door open for more bond buys
* Governor King sees limits to what BoE can achieve
* Rise in jobless benefit claims adds to bad news on economy
* King sees independence intact despite government payments
By David Milliken and Olesya Dmitracova
LONDON, Nov 14 (Reuters) - Britain faces years of meagre economic growth coupled with rising prices, the Bank of England warned on Wednesday, adding that its ability to numb the pain was nearing its limit.
Governor Mervyn King left the door open for yet another cash injection of bond buying as he presented the central bank's downbeat outlook. He said the economy may shrink again at the end of this year, just one quarter after it exited recession.
But, he said, monetary policy could only go so far in helping the economy adjust to the new post-financial crisis world of debt reduction and weak growth.
King's comments came as Britain's hitherto resilient labour market showed signs of weakness, with the biggest rise in over a year in the number of people claiming jobless benefits.
The outlook makes dire reading for the Conservative-led government only weeks before finance minister George Osborne is to give his half-yearly budget update.
He may be forced choose between missing his debt reduction goal or adding more spending cuts and tax rises to his austerity plan.
"We face the rather unappealing combination of a subdued recovery with inflation remaining above target for a while," King said in the news conference to present the BoE's quarterly Inflation Report.
Moreover, King warned that better times were still a long way off.
"If (the) unfavourable world environment persists -- and there is little sign of any change to the underlying problems in the euro area -- it may be unreasonable to expect anything other than a slow and protracted recovery," he said.
The opposition Labour Party said the central bank's outlook was proof that the government's policies had failed.
But junior finance minister David Gauke defended the austerity measures, saying the international environment was to blame for the country's "long and challenging" recovery.
Britain has not fully recovered the output lost during the 2008-2009 slump, which left most Britons worse off as high inflation and tax hikes ate away meagre wage increases.
The Inflation Report showed the BoE sees growth well below its long-run average over the next three years, failing to exceed 2 percent even in 2015.
At the same time, inflation was likely to be above its 2 percent target over the next 18 months, the report showed, posing a barrier to further policy stimulus.
The outlook for inflation was the main reason why the policymakers decided to stop the quantitative-easing purchases of gilts last week, King said, rejecting suggestions that the policymakers had lost trust in this tool's ability to boost demand.
But King reiterated his view that there were limits to what monetary policy could achieve. "What is limiting our ability to do more is not on the monetary side, it is on the real side that the economy has to adjust to a new equilibrium," he said.
Currency and bond markets focused on different parts of his message. Gilts fell as investors cut expectations of near-term bond buying, while sterling dipped on the gloomy outlook and King's displeasure at its gain against the euro since last year.
"The outlook is pretty DIRE - Disappointing Inflation and Rotten Expansion," said IHS Global Insight economist Howard Archer in a note.
"This is in marked contrast to the NICE decade that Sir Mervyn often used to refer to before the 2008/9 recession -- Non-Inflationary Consistent Expansion," he said, adding that 50 billion pound more in quantitative easing remained likely.
King also batted away criticism of the decision to transfer back to the government the interest the central bank had received on the bonds it bought as part of its stimulus programme, which had raised questions about the Bank's independence.
The government's decision did not undermine the role of the rate-setting MPC or hurt independence, he said.
"It doesn't in any way effect our ability to set monetary conditions or control the total amount of asset purchases or sales or the timing of them," he said.
He also rejected the notion that the move was a step towards ultimately monetising the government's huge debt pile.
"Parliament can always decide to do what it wants. Parliament is supreme. But the Monetary Policy Committee certainly won't do that and the Chancellor re-affirmed that the MPC is in total control of asset purchases and asset sales," he said.