Britain moved a step closer to recession today as gloomy figures from the services sector suggested the economy has ground to a halt while manufacturing output fell more sharply than expected.

The UK services sector shrank for the third consecutive month in July, though at a slower pace as expected, according to the Chartered Institute of Purchasing and Supply/Markit’s Purchasing Managers' Index (PMI).

The leading index of activity in Britain’s private service companies, which range from banks to cafés and account for nearly a third of the economy, rose from 47.1 in June to 47.4. Any reading under 50 indicates contraction.

However, any hopes of a pick up in activity were dashed as the index of new business declined at the fastest rate in the survey’s 12-year history.

Vicky Redwood, UK economist at Capital Economics, said: "The latest UK data suggest that the economy has ground to a halt. Indeed, it is quite possible that the economy has already have entered a recession."

Today's figures are released after PMI results for construction and manufacturing, which account for 20 per cent of the economy, also hit record lows.

Official figures also showed that manufacturing output fell 0.5 per cent in June, the fourth consecutive monthly fall. Analysts had expected output to remain unchanged.

The annual decline in output is now 1.3 per cent, the biggest fall since December 2005. The broader measure of industrial production also unexpectedly fell 0.2 per cent in June, taking the annual rate to -1.6 per cent.

The Office for National Statistics said the figures would shave about 0.06 percentage points off its initial estimate for second quarter GDP, which was reported as 0.2 per cent growth.

Philip Shaw, an economist at Investec, said: “The manufacturing and industrial production data are very disappointing. Together with back revisions, they suggest there is a chance that second-quarter GDP could be revised down from an already weak pace of activity.”

Ms Redwood said: "With the manufacturing and construction surveys already released also remaining weak, a weighted average of the surveys continues to suggest that GDP has stagnated going into the third quarter."

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive