Fears that Britain is edging towards a recession were heightened today after the service sector, which makes up 60 per cent of the UK economy, reported falling activity for the fourth month in a row.

The CIPS/Markit report on services, which gauges activity in companies ranging from accountants and banks to cafes and hotels, was 49.2 in August.

Any figure below 50 indicates that the sector is contracting, rather than growing.

August's figure was up from July's reading of 47.4, signalling that the pace of decline is slowing. There was a glimmer of hope that falling oil prices were easing the pressure on companies as input price inflation fell to a five-month low of 66.8, although this is much higher than the average of 59.6 last year.

But Roy Ayliffe, director of professional practice at the Chartered Institute of Purchasing and Supply, remained downbeat, saying: “Any murmurs of hope were silenced by recession fears and uncertainty continued to dominate, as the property downturn hit client spending."

Yesterday, the Organisation for Economic Co-operation and Development, an influential think-tank, forecast that Britain would plunge into recession in the second half of this year, with the economy shrinking in two consecutive quarters.

Companies are also continuing to axe jobs within the services sector.

The index of employment rose modestly to 47.9 in August, up from 46.6 in July, indicating that the situation has improved slightly, but any figure below 50 signals the jobs are being cut, rather than created.

Mr Ayliffe said: "Teamed with intense cost pressures, stemming from suppliers hiking their utility and goods prices, this led to the further trimming of jobs in the sector, with job cuts most prevalent in hotels and restaurants.

"To protect their firms’ margins, purchasing managers raised output charges, which remained close to record highs."

Howard Archer, chief UK and European economist at Global Insight, said: "While the service sector survey is better than feared, this is hardly a cause for celebration as it is still a very weak report that does little to alleviate the belief that the economy is likely to contract over the second half of the year. "

The Bank of England's Monetary Policy Committee begins its two-day meeting today to discuss the UK interest rate and is widely expected to keep borrowing costs on hold at 5 per cent when it announces its decision tomorrow.

Mr Archer said: "...the easing back in the prices indices boosts hopes that the Bank of England will feel able to cut interest rates before the end of the year, although a move tomorrow remains highly unlikely."

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