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The Bank of England's Monetary Policy Committee will announce its decision on interest rates at midday on Thursday.

The survey of more than 5,000 businesses suggested that an economic recession had already started and was getting worse. Confidence balances for both manufacturing and services sectors fell sharply for a second consecutive month to their lowest level since 1989 while cashflow balances and recruitment also dipped across the sectors.

David Kern, economic advisor to the BCC, said: “Overall, the alarming Q3 results point to worsening dangers of major economic downturn and rising unemployment.

“The results support the view that a UK recession has started and the downturn is getting worse. The domestic economy is under immense pressure. "

The survey reveals sharply weakening domestic sales and orders for both manufacturers and service sector companies, with the balances well into negative territory and at long-term lows. Export sales and orders balances for manufacturers weakened sharply in the third quarter.

In contrast, there was a somewhat surprising modest improvement in the services sectors' export balances, although they remained relatively low by long-term norms. Both manufacturers and services companies were markedly more pessimistic about the prospects

The manufacturing sector’s confidence balance plummeted 28 points to 4 per cent while profitability confidence plunged 16 points to -11. In the services sector, both figures fell 7 points to 10 per cent and 13 points to -12 respectively.

Howard Archer, chief UK and European economist at Global Insight, said the BCC survey made "dire reading and reinforces our belief that the economy contracted in the third quarter and is well on its way into recession".

He pointed out that the survey was carried out between August 25 and September 15, since when "the financial sector turmoil has intensified substantially and credit conditions have tightened markedly further".

Mr Archer pointed to businesses' employment expectations, where balances plunged to a near 16-year low for both manufacturers and service sector companies, as a worrying trend.

"This adds to the ever mounting evidence that very weak economic activity and deteriorating business confidence is taking a significantly increasing toll on the labour market," he said.

In the wake of yesterday's 391.06 point fall in the FTSE 100, David Buik, partner at BGC Partners, said that although the market had been furious at the Chancellor's "nebulous speech" yesterday, there was "a feeling that something positive might come out of the banking reforms".

But he gave warning that it would take time for such measures, including the American bailout, to be put into practice, and that until liquidity returned, markets would remain volatile "for some time to come".

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