The powerful services sector - the locomotive of the UK economy - shrank in June at its sharpest rate since the aftermath of the 9/11 terrorist attacks, raising fears in the City that Britain may soon be gripped by recession.

"We are at serious risk of a recession," said Alan Clarke, an economist at the London office of French investment bank BNP Paribas. "What we're facing is a prolonged, elongated slowdown, especially with no helping hand from the Bank of England in the shape of rate cuts."

Economist Peter Newland at Lehman Brothers said that a recession before the end of the year "is more likely than not".

Researchers who compile the Chartered Institute of Purchasing and Supply/Markit survey agreed with Clarke and other economists, pointing out the composite reading of the services, manufacturing and construction sectors' plunge to a series low.

That view was supported by a separate survey released by the Bank of England that showed lenders expect to further reduce mortgage lending to households and tighten credit criteria in coming months.

Economic contraction in two successive quarters constitutes a technical recession, according to City analysts.

However, services industries - ranging from banks to restaurants - are still raising their prices to partly offset record cost inflation, and that is likely to bolster the view that the Bank of England is no position to cut interest rates yet to help lift Britain's anaemic levels of growth. The Bank's Monetary Policy Committee meets next week to set UK base rates.

"We suspect that with inflation likely to peak at around 4.5% late this year and with the Bank of England concerned about potential second-round price effects through a price-wage spiral, that there is little scope for a rate change before year-end, up or down," said James Knightley of ING Financial Markets.

There are growing concerns over the impact of the global credit crunch on an economy that has not suffered two consecutive quarters of contraction since the early 1990s.

Official growth figures show the economy still expanding by 0.3% on the quarter in the first three months of 2008, albeit at the slowest rate in three years.

But a credit squeeze for households and businesses looks set to intensify over the coming months as lenders brace for rising defaults amid the deteriorating economic outlook.

The Paris-based Organisation for Economic and Development warned on Wednesday that UK unemployment would soar by 100,000 by 2009 and growth would slow markedly.

The UK central bank's quarterly credit survey, conducted between May 27 and June 18, showed default rates on secured lending to households rose by more than anticipated in the second quarter and lenders expected a further increase in the coming months.

A pick-up in corporate defaults was also anticipated.

Companies from banks to builders are being hit by the credit squeeze and economic slowdown.

Builder Taylor Wimpey said on Wednesday it had failed to raise the £500m it needed at the start of the week and said yesterday its chances of raising that money by the end of the week were less than half.

The housebuilder needs the money for lenders to agree to ease the terms of its financing and avert the risk of breaching bank covenants next year. Analysts speculated it might now consider selling assets to survive after being hit by the worst housing slump since the early 1990s.