The UK's top law firms are steeling themselves for a difficult year ahead with confidence among senior managers falling for the first time in six years, according to a survey. The news will add to fears that the legal market may have peaked.

Just over half of managing partners surveyed by Smith & Williamson, the professional services adviser, said that they were concerned about the impact a worsening global economy will have on their business. Last year, only 17 per cent expressed the same fear.

The survey also said that profits, which have surged to record levels over the past decade, are likely to suffer this year as they come under increasing pressure from flattening revenues and increasing costs from salaries and other expenses.

Giles Murphy, the head of assurance and business services at Smith & Williamson, said: “Whilst the overall outlook for law firms remains healthy, the market seems to have peaked.

“Many practices are grappling with increasing costs as they have had to ramp up salaries to get the people they need while also dealing with rising property costs. At the same time income levels are flattening. Although the percentage changes for costs and revenue may be quite small, the combination of the two can have dramatic implications for profits.”

This week, Barton Winokur, the chairman of the law firm Dechert, told the Legal Intelligencer that 2007 had been a “difficult” year with booming salaries driving the largest cost increases he had ever seen.

Law firms are generally reluctant to shed large numbers of staff for fear of being caught out if the markets pick up again. In this light, the need to recruit and retain quality staff will continue to dominate law firms’ agendas this year, Smith & Williamson said, with recruitment issues remaining the most frequently mentioned difficulty facing individual firms over the next 12 months.

Mr Murphy said: "The problem is primarily a lack of talented people rather than the lack of numbers, and this pressure on recruitment tends to force up payroll overheads. For those firms who have been investing in new talent, the economic uncertainty could not have come at a worse time.”

Guy Beringer, senior partner at Allen & Overy, said: "Market conditions are volatile and unpredictable but this will produce some opportunities as well as considerable challenges.

"Law firms which are flexible and which have a broad international base in the Middle East and Asia should be able to identify the opportunities even if the general picture in Europe is challenging."

Despite concerns about rising costs and profit levels, many law firms are still likely to consider merging. Ninety per cent of managing partners said they expect levels of merger activity to stay the same or increase this year.

Mr Murphy said: "The trend towards increased consolidation seems to be continuing with a third of firms admitting that they were actively seeking a merger or acquisition.

“The main motivating factors are to forge links with a firm with complementary areas of activity, to grow the client base and as a means to develop specific sectors. Whilst these were all considered of equal importance, merging as a means to achieve greater profits was secondary."

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