Lord Harris of Peckham, the founder and chairman of Carpetright, fears that the high street is facing one of its toughest years for half a century, in the bleakest warning yet about the fallout from the credit crunch.

The retail veteran said yesterday that stores were not only battling weaker consumer confidence but also rising petrol prices and a stronger euro, which were fuelling inflationary pressures across the sector.

He added that the British economy might not begin to pick up until 2011: “We're in a mess,” he told The Times.

The gloomy remarks came during another dismal day for retail stocks in the City, with the FTSE 350 General Retailers index falling by 4 per cent as analysts continued to cut their earnings targets for 2008-09.

The share price falls so far this year mean that non-food retailers are on their lowest stock market valuations since 1974 and the Opec oil crisis.

Marks & Spencer fell by more than 3 per cent yesterday, while HMV tumbled 13 per cent despite sticking to its targets for the coming year.

Shares in Carpetright fell by 6 per cent to 619p as Lord Harris's pessimism completely overshadowed annual results that met City expectations, with underlying pre-tax profits up 7.6 per cent to £62.1 million for the year to May.

Lord Harris, who as a teenager in the 1950s took over his father's market stall, said there was no doubt that the floor covering and DIY-related sector had become more challenging: “We are in a very, very difficult market and I think the next year will be one of the most challenging of the past 50 years.

“Sales are difficult to achieve, but we have the euro as well. Around 70 per cent of what we buy is in euro and it has increased by 15 to 16 per cent in the past year. We have to pass that on to consumers already facing higher fuel prices. It takes £80 to £100 to fill a car up now. You could buy a carpet for that.”

Lord Harris said that large numbers of smaller, independent carpet retailers had been forced to give up already. “They're disappearing, they are finding it very difficult. They are either retiring, trying to sell or going into administration.”

The peer, a friend of David Cameron, the Conservative Party leader, added that he expected little improvement in trading conditions under the present Chancellor.

“Does anyone?” he asked. “He's got to get confidence back in the country, he's got to get the housing market moving again. He could give tax credits to first-time buyers. It's what the country needs - we need a bit of confidence.”

Carpetright is downsizing about 100 of its 559 stores in the UK and the Republic of Ireland to cut the rental bill. It expects to open 17 stores in Europe over the next year, across its operations in the Netherlands and Poland.

Lord Harris said that the group would investigate selective acquisitions in Britain as values fell.

Carpetright shares have fallen almost 20 per cent since The Times revealed in May that Bill Gates, the Microsoft billionaire, had taken a minority 3 per cent stake in the business through his Cascade investment vehicle.

Lord Harris said that he had lost more money through his own 24 per cent shareholding: “We're in this for the long term, we're not looking at the short term. I'm sure we're going to make him a lot of money.”

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