British manufacturing activity fell at its fastest rate in a decade during July as companies struggled with the soaring cost of raw materials and a drop in orders, raising fears a recession is inevitable.

The Chartered Institute of Purchasing and Supply (CIPS)/Markit Purchasing Managers’ Index (PMI) fell to 44.3 last month from 45.9 in June, the third consecutive monthly decline.

Last month's fall in activity was below analysts' expectations of a reading of 45.5 and is the lowest figure since December 1998.

Any figure below 50.0 indicates contraction rather than growth in a sector.

Analysts said that today's dismal reading, coupled with equally gloomy figures from the PMI index for the construction and services sectors, suggest that the economy is heading for recession.

Alan Clarke, economist at BNP Paribas, the French investment bank, said: "Recession here we come! The fall in the manufacturing CIPS means the composite CIPS is now consistent with negative GDP growth."

Vicky Redwood, UK economist at Capital Economics, said: " The manufacturing sector clearly appears to be tumbling into recession. And if the services balance fails to pick up in next Tuesday’s report, the surveys will still be suggesting that the economy has ground to a complete halt."

The balance of purchasing managers at manufacturing companies reporting that input prices were rising rather than falling increased to 82.4, the highest figure on record as spiralling oil prices took their toll on companies.

Worringly for the Bank of England, which is battling to keep inflation under control as energy price rises push up the cost of living for consumers, the output price index also rose to a record high of 63.1 from 62.6, indicating that more companies were passing on their high input costs to customers.

Businesses are also facing a slump in new orders. The balance of purchasing managers reporting a fall in new orders rather than a rise in July, fell to 40.5, the lowest level in nine and a half years. This reading has remained below 50 every month this year.

The reading has had a knock-on effect on employment, with the number of purchasing managers reporting that staffing levels in the sector have fallen reaching the same reading as the final quarter of 2001.

Job losses have now been recorded in each of the past four months, with the rate of decline accelerating. Earlier this month the CBI said the manufacturing sector could lose 36,000 jobs over the rest of the year.