Fears of a double-dip recession were fuelled today as a survey revealed the UK's powerhouse services sector suffered its worst slowdown in activity in 10 years.
The Markit/CIPS Purchasing Managers' Index (PMI), where a reading above 50 indicates growth, showed services activity fell to 51.1 in August from 55.4 in July.
The drop was the worst for the services sector, which makes up around 75% of the total economy, since the foot and mouth crisis of 2001 and was greater than declines seen after the collapse of Lehman Brothers bank in 2008.
Economists said the dismal figures pointed to a potential contraction in gross domestic product (GDP) in the third quarter of the year and increased pressure on the Bank of England to inject more cash into the economy to jump-start the recovery.
The slowdown in growth was driven by economic uncertainty and a weak underlying trend in new business, Markit said.
The volume of new orders rose at its slowest rate since February, the survey said, while business confidence was at its lowest this year.
Elsewhere, there was a further blow to UK jobs prospects as the service sector reported a further drop in employment.
The UK economy grew at a meagre 0.2% between April and June, which included 0.5% growth for the services sector.
Samuel Tombs, UK economist at Capital Economics, said: "With growth in all sectors of the economy now very weak, the chances of a double-dip in overall GDP are high and rising."
There was some respite for the Bank of England on the inflation front as input prices eased in August, growing at the slowest rate since November last year.
The Bank is grappling with high inflation, which at 4.4% in July is more than double the Government's 2% target.
Howard Archer, chief UK and European economist at IHS Global Insight, said the survey fuelled expectations the Bank will hold interest rates at 0.5% and increase its Quantitative Easing (QE) programme.
But he added further QE still seems unlikely at Thursday's meeting of the Bank's Monetary Policy Committee "given still significant near-term inflation concerns".
The Bank currently has its QE package at £200 billion and has faced lone calls from MPC member Adam Posen to increase the stock by an additional £50 billion.