The UK is facing a serious risk of recession within months, the findings of a survey of almost 5,000 small and medium-sized businesses suggest.
The British Chambers of Commerce's (BCC) quarterly report found the credit crunch and rising costs had dented the most important sectors of the economy.
Firms in the manufacturing and services sector said domestic sales and orders had slowed over the past three months.
The survey came as housebuilder Persimmon said it had cut 1,100 jobs.
The building firm said that completions of house sales in the first six months of the year were down 30%, during what it described as the "most challenging period in our recent history".
Grim outlook
The BCC, which represents many small and medium-sized businesses, also said firms were experiencing serious cash-flow problems.
Its economic adviser, David Kern, said the survey showed a "menacing deterioration" in UK prospects.
"We are now facing serious risks of recession," he said.
"The outlook is grim and we believe that the correction period is likely to be longer and nastier than expected."
There are a number of definitions of a recession, but the most commonly used one is when there are two quarters in a row of economic contraction, or negative growth.
Services firms, which include restaurants, gyms and tour operators, have been particularly hard hit, the BCC reported.
Sales and orders, job expectations and confidence in this sector had hit their lowest levels since the recession of the early 1990s.
The BCC's director general David Frost said the report was deeply worrying.
There has been disappointing news on house building and mortgages
"I am sending Alistair Darling and Gordon Brown a strong message from the businesses I meet every day up and down the country," he said.
"To put more pressure on business would not only restrict business growth and hit the consumer hard, it would crush further what our economy is based on - confidence."
The report is likely to add to the wave of pessimism sweeping across the business world, from retailers to house builders.
Last week, the housing market suffered another blow when the Bank of England said mortgage approvals had plunged by 28% in May and were 64% lower than a year earlier.
House builders are cutting jobs and offices as the property slump continues. Before the news of the job cuts at Persimmon, rival builders Taylor Wimpey and Barratt Developments had announced 2,000 redundancies in the past week.
The mortgage drought has meant many people have been unable to secure the finance they need for a new home, while falling property prices have also put people off buying.
There was more bad news for the economy on Monday, when official figures showed that industrial output was falling at its fastest rate for more than a year.
Meanwhile, Marks and Spencer sent shivers across the retail sector last week when it reported a shock downturn in sales.
Some economists believe the chances of a recession in the UK are now 50:50.
They had hoped the slowdown in the economy would eventually reduce inflation, without turning into full-blown recession.
http://news.bbc.co.uk
