That's what we originally thought... imagine our shock when we recently found out otherwise!
The parents must be married to each other. I confirmed this with the Home office.
The home office website states:http://www.ind.homeoffice.gov.uk/ind/en/home/applying/british_nationality/advice_about_nationality/bn1_-_british_citizenship.html?
The child will be a British citizen if one of his or her parents (see Note 4) is a British citizen at the time of the birth. It does not matter how the parent concerned became a British citizen. If neither parent is a British citizen, the child will still be a British citizen if one of his or her parents is settled here (see Note 5) at the time of the birth.
Note 4:
Only a legitimate child (born to parents who are married to each other) can get British citizenship from the father. However, if the parents are not married when the child is born in the United Kingdom, but then get married, and the marriage legitimates the child then if the father was a British citizen (or settled) when the child was born, the child would become a British citizen and would be regarded as having been one from birth.
As for the second point, I am not considered settled as I am here on a work permit with limited leave to remain.
I hope I am missing something... we are a bit unhappy with this scenario as we had wanted the baby to be dual....