Britain’s services sector shrank last month at a record pace, stoking fears that a recession is inevitable.

Output in the services sector, which is responsible for about three-quarters of Britain’s GDP, suffered its biggest fall since 1996.

The data emerged two days after a separate survey revealed that activity in the manufacturing sector had also shrunk at a record rate while the Office for National Statistics (ONS) confirmed that the British economy failed to grow during the second quarter.

Today’s worst-than-expected reading on the services sector, along with the ONS data, will stoke fears the UK economy is shrinking and falling into recession. The technical definition of a recession is two consecutive quarters of contraction.

The sector also shed jobs for a fifth successive month, through a combination of layoffs and non-replacement.

The output index slumped to 46.2 from 49.3 last month, where figures below 50 entail a reduction in economic activitiy. The services sector of the economy, which includes the beleaguered financial sector, is now in recession.

The findings will pile pressure on the Bank of England to cut the interest rate when its Monetary Policy Committee (MPC) meets next week. Businesses hope that the MPC will cut borrowing costs by a quarter point to 4.75 per cent.

David Blanchflower, the most dovish member of the MPC, told the Gloucestershire Echo that he will be pushing for a cut at next week’s meeting.

He said: “We are a committee of nine and we will make a decision on Thursday.

"But my view is that the interest rate must come down and I will be telling that to the committee."

Michael Saunders, a Citigroup economist, said: “The only debate now is whether the MPC will cut 25 basis points or 50 basis points.”

The Chartered Institute of Purchasing and Supply (Cips) services sector index was at its lowest since it began in July 1996.

Howard Archer, chief European and UK economist at Global Insight, said: “This is an especially worrying report, given the importance of the dominant service sector to the UK economy.”

He said: “The sharp decline in service sector activity in September leaves little doubt that the economy contracted in the third quarter and is on its way into recession.

“The very weak service sector report for September plus evidence of moderating price pressures reinforces our belief that the Bank of England will cut interest rates next Thursday.”

Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club, said: "It is not just the financial services sector that is in trouble - the slowdown is widespread. The hotels and restaurants industry saw the largest contraction in output – a sign that impact of the credit crunch is seeping into the real economy."

Consumers and homebuyers already face a squeeze in the run-up to Christmas because banks have said they will make loans even harder to secure.

High street banks are already cutting off the flow of funds to customers, according to the Bank of England.

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