Business activity is continuing to fall in Scotland, but the rate of decline is slowing as London remains the only part of the UK that is seeing private sector expansion.

Firms are shedding jobs at the fastest rate since the Royal Bank of Scotland began publishing its Purchasing Managers' Index in January 1998, according to the latest edition of the survey, published today.

It shows that output, new business and backlogs of work all declined during September.

But while in previous months Scotland has ranked alongside Northern Ireland as the hardest-hit parts of the UK, a dramatic downturn across the country over the month saw key manufacturing regions such as the West Midlands report sharper declines.

David Fenton, RBS head of microeconomics, said: "The global financial crisis entered a turbulent new phase in September, which had a predictable effect on the tone of the September report.

"Business activity fell again, though the rate of decline was less severe, which hopefully marks the beginning of a more stable period for the activity index."

He suggested that moves by the government to help out UK banks should bolster confidence and boost demand.

Research released by Ernst & Young at the weekend revealed there were 111 profit warnings issued in the three months to September 30, the highest third-quarter figure since 2001 and a third higher than the same period last year. Just six of them were issued in Scotland, but the accountant said this was probably because many Scottish companies, particularly in the retail sector that is being battered by slowing consumer spending, are headquartered south of the border.

According to the RBS data, output fell in manufacturing and service sectors last month, with the latter showing the steeper rate of decline.

The rate of decline has eased but it still represented the sixth consecutive decline in activity as companies blamed a lack of orders from both domestic and international customers.

Incoming new business to Scotland's private sector firms continued to decline during September, albeit the weakest contraction for three months. The service sector was worst hit, with respondents blaming the financial crisis.

The lack of new business meant that firms progressed through their pipeline of business. There was a further decline in September in the number of orders-in-hand but not yet completed. The fall was again centred on the service sector, which reported the sharpest fall in outstanding business in the survey's history. Manufacturers posted the weakest decline in backlogs for three months.

Staffing levels in Scotland were reduced for the sixth consecutive month during September and were broadly in line with UK-wide declines as firms sought to reduce costs. In Scotland nearly one in five (19%) manufacturers reported a fall in staffing as did 21% of service firms, nearly double the number who added staff. The financial services sector posted an acceleration in the rate of staff shedding during the month.

Companies are still finding it hard to absorb costs, with costs for Scottish firms continuing to rise, albeit at a slightly slower rate than in August. But the rate of inflation for companies north of the border still remains higher than the UK average, with firms indicating that wage, fuel and energy costs had all contributed to the rate of inflation.

Even with job cuts, they had to pass some of these costs on to customers, with output prices rising for the sixteenth consecutive month. Firms in the manufacturing sector were able to put up prices more than their service sector counterparts.