Britain's services sector, which accounts for about two thirds of the economy, recorded its worst-ever performance over 2008 as activity continued to slow and companies forecast the steepest fall in employment in nearly 13 years.

The Chartered Institute of Purchasing and Supply (CIPS)/Markit purchasing managers’ index showed that activity in December, at 40.2, was broadly in line with a reading of 40.1 during November.

However, activity in the services sector, which spans businesses from cafes to banks, remains well below the benchmark of 50 - the dividing line between growth and contraction.

CIPS said today: "The latest reading confirmed that the sector has suffered its worst calendar year since the survey began in mid-1996, with the index averaging well below 50.0 over 2008 as a whole."

The figures emerged before the Bank of England's Monetary Policy Committee (MPC) is due to begin its two-day meeting on Wednesday to decide on whether to make a further cut to the UK interest rate.

The MPC is expected to slash borrowing costs by at least half a point from 2 per cent to 1.5 per cent. However, some economists are predicting the Bank will go further when it announces the decision on Thursday and reduce the base rate to 1 per cent in an effort to stimulate the economy.

The CIPS survey added to growing fears for unemployment over 2009, with the index dropping from a reading of 43.1 in November to 40.5 last month, and companies forecast the strongest net reduction in employment in nearly 13 years.

The survey also revealed that business confidence remained extremely fragile during December, with a number of companies expect the current downturn to continue into 2009 and negatively impact on activity and turnover.

Howard Archer, chief UK and European economist at IHS Global Insight, said that although the data was not quite as bad as expected, with economists forecasting a reading of 39.0, it was still "terribly weak."

He added that the survey pointed to a "significantly deeper decline in GDP in the fourth quarter of 2008 than the 0.6 per cent contraction seen in the third quarter."

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