Urging a new partnership between industry and government, Howard Davies, director-general of the Confederation of British Industry, criticised the decision to close British Coal pits as 'panicky'.
'We are at a very decisive moment now, where we need a clear lead from the Government if we aren't going to talk ourselves into a slump,' he said.
Mr Davies called for the Bank of England to be made independent to restore credibility in monetary policy. The markets lacked confidence in the Government's anti-inflation strategy which hampered the Treasury's ability to announce badly needed cuts in interest rates.
By contrast, an independent Bank of England would be 'the key to getting rates down quickly', Mr Davies said.
The CBI director-general also urged the Government to avoid cuts in capital spending, education and training in the current spending round and said it should agree on long-term spending priorities with industry.
'If we ask ourselves how government is making those decisions, there seems to be no strategic framework to decide how to spend the last billion or how to cut the last billion,' he said.
Mr Davies' warning of a slump was echoed by Neil Johnston, director-general of the Engineering Employers Federation, who called on the BBC radio Today programme for 'action, and action now' if the country was to avoid further decline.
In the City, economists warned that Britain could slide into a slump without further reductions in rates and a restoration of political leadership. They forecast that political and economic pressure would soon force the Government to act on the economy.
City analysts roundly criticised the Treasury's failure to lower interest rates.
Warning of an economic implosion, Ian Shepherdson, of Midland Montagu, said: 'The deflationary forces are so strong that to lay a German monetary policy on the balance sheet of UK plc is a disaster.' He added: 'We are on the verge of a serious, drastic depression.'
David Walton of Goldman Sachs said: 'The recession has embarked on another downturn. Further interest rate cuts are surely in the pipeline.'
Their comments came as the first full survey of consumers by Gallup since the devaluation of the pound disclosed a steep erosion in confidence.
Conducted for the European Commission from 1-13 October, the Gallup poll showed that the index of confidence dropped to minus 28 this month from minus 20 in September. It was the lowest expression of confidence since the second quarter of 1990, just before recession began, and adds weight to predictions that recession has begun to deepen again.
Expectations of an improvement in the economy in the next 12 months slid to minus 35 from minus 31, the survey revealed. The proportion of households that thought their financial situation would improve in the coming year dropped to minus 15 from minus nine.
However, the Gallup poll was completed before British Coal's announcement of large-scale pit closures and job losses at Lucas brought the latest knock to confidence, which suggests a further decline in the index could lie in store.
The pessimism was shared by the financial markets yesterday, with both shares and the pound falling in the absence of a further cut in interest rates.
The FT-SE 100 index dropped by 38 points at one stage as worries over the state of the economy deepened and the Treasury failed to cut rates as some had hoped. By the close, it was 28.1 points lower at 2,546.6.
Similar sentiment clouded the outlook for the pound, which fell by 3.58 pfennigs to DM2.4652. But sterling was also depressed by the Bundesbank's decision to leave its key rates unchanged.
Against a weighted basket of currencies, the pound lost 0.9 points to close at 81.8 per cent of its 1985 value.Reuse content