The UK has fallen from fourth to eighth place, more than reversing the previous year's gains, according to the annual competitiveness rankings published by the World Economic Forum.
Professor Jeffrey Sachs, professor of economics at Harvard University and one of the authors of the report, said: "The UK is still one of the more competitive economies in the world, but it is a meaningful drop."
Despite the financial crisis that started in mid-1997, three of the top four most competitive countries are Asian, with Singapore in first place and Hong Kong and Taiwan third and fourth. The US has edged up to second place in this year's report.
The crisis has sorted the sheep from the goats among the tiger economies. Malaysia's ranking is nearly unchanged at number 16, while Korea, Thailand and Indonesia have fallen to 22nd, 30th and 37th respectively. Indonesia has plummeted 22 places.
At the bottom of the league languish the same four countries as last year: Russia, Ukraine, Zimbabwe and Colombia. All are characterised in their different ways by the absence of any rule of law, unreliable property rights and poor infrastructure. The high-profile annual report puts greater emphasis than before on microeconomic foundations for long- term success, especially a country's capacity to innovate.
Microeconomic rankings fed into the overall league table include measures of the degree of competition and vitality of anti-trust policies, the amount of red tape, technological infrastructure and communications costs and the quality of education.
The report finds that the UK is falling behind in its technological capability, on top of a long-standing weakness in scientific education.
It also raises concerns about the increase in red tape affecting business and relatively weak competition. The strength of the pound also contributed to the deterioration in the UK's performance.
The report predicts the euro's weakness will boost the position of continental economies in future years - most of them moved very little in the rankings between 1998 and 1999.
Professor Sachs said: "The depreciation of the euro vis a vis the US dollar will prove a major plus for the European economies in terms of employment and growth, even though it is viewed with some concern now."