Fears of a UK recession mounted yesterday when news of the worst monthly drop in incoming new business in the dominant service sector during the 12-year history of a key survey coincided with grim official manufacturing data.

And building society Nationwide will today reveal a plunge in UK consumer confidence last month to another record low - in the context of a monthly survey first published in May 2004.

Fionnuala Earley, Nationwide's chief economist, says: "Talk of the increasing chances of a recession, more weakening in the housing market, and the continuing rise of food and energy costs will have further dented confidence, as will reports of job losses."

The Chartered Institute of Purchasing and Supply (CIPS) highlighted weakening business and consumer confidence as the drivers of the biggest monthly drop in incoming new business in the UK service sector since comparable records began in July 1996. The financial and hotel and restaurant sub-sectors were hit particularly hard as new orders plummeted in July.

CIPS's closely watched service sector report also showed tumbling employment - with the decline in staff accelerating last month to be joint-second-strongest in the survey's history.

The headline business activity index for services ticked up from 47.1 in June to 47.4 in July. However, this still indicated a third consecutive month of decline in service sector output and the July figure still points to significant contraction, given it is well adrift of the 50 no-change mark.

Service companies' confidence fell in July to the lowest level in the survey's 12-year history, with the 24% of firms expecting a fall in activity from current levels the worst such number recorded by CIPS.

The only very narrow chink of light in CIPS's service sector survey was the finding that rampant inflationary pressures did not get any worse.

CIPS's input prices index for services dipped from 71.7 to 70.2 - although this still signals a very rapid rate of increase in firms' costs. The prices-charged index dipped marginally - from 56.0 to 55.9 - but this still shows service companies managing to push through significant price increases.

The Office for National Statistics (ONS) meanwhile said yesterday that UK manufacturing output dropped by 0.5% in June - a much worse outturn than the City's prediction of an unchanged month-on-month position.

June's drop means manufacturing output has, on the ONS's measure, now fallen for four consecutive months for the first time since the September to December 2001 period.

The fall in June left manufacturing output 1.3% lower than in the same month last year - the biggest year-on-year fall since December 2005.

Industrial production, which includes mining and quarrying, oil and gas extraction, and electricity, gas and water supply as well as manufacturing output, fell by 0.2% in June.

The ONS, which had estimated that industrial production fell by 0.5% during the three months to June when it last month put overall UK gross domestic product growth in the second quarter at an anaemic 0.2%, said yesterday that this component had actually dropped by 0.8%.

This would, the ONS added, shave about 0.06 percentage points off second-quarter growth. On the face of it, this makes a downward revision of second-quarter growth from 0.2% a distinct possibility.

Vicky Redwood, UK economist at consultancy Capital Economics in London, said: "The latest UK data suggest that the economy has ground to a halt. Indeed, it is quite possible that the economy has already entered a recession."

The technical definition of a recession requires two consecutive quarters of falling economic output, so the UK is not there yet.

But Redwood said: "The economy is clearly still on course to enter a technical recession."

She calculated that a weighted average of CIPS's July manufacturing, services and construction sector surveys suggested that official UK gross domestic product "has more or less stagnated going into Q3".

Redwood added: "What's more, the surveys do not cover the retail sector. So, with retail sales on a downward trend, it is possible that GDP is already falling."

The latest bad UK economic news yesterday reinforced expectations that the Bank of England's Monetary Policy Committee will hold base rates at 5% when it concludes its latest two-day monthly meeting at noon tomorrow.

The prospect of much tougher economic times around the globe played a part in another significant fall in oil prices yesterday.

Benchmark US light crude fell as far as $118 a barrel during trading - its lowest since May 5. Waning concerns about the potential for Tropical Storm Edouard to damage oil infrastructure in Texas also pushed oil lower.