Analysts expect the Bank of England will hold interest rates at 5 percent on Thursday as the central bank is concerned that inflation is running at nearly twice the 2 percent target and is seen going higher yet.

The July survey did, however, show input cost inflation easing from its record peak.

It also highlighted the extent to which the credit crunch and weakening property market were weighing on the sector which accounts for three-quarters of Britain’s economy.

Business confidence fell to its lowest level since the survey began, outstanding business contracted for a 10th straight month and employers made hefty cuts to their workforce.

"While services activity fell at a slower rate during July, the risks to future trends in the sector remained clearly skewed to the downside," said Paul Smith, senior economist at Markit Economics which compiles the survey.

"The record contraction in new business, severe cost pressures and deteriorating sentiment all point to the continuation of difficult times ahead."

BLEAK OUTLOOK

Most analysts expect Britain will narrowly avoid a recession but a drip-feed of dismal economic data in recent weeks has made it an increasingly close call.

Official figures show the economy expanded by 0.2 percent in the second quarter of this year after 0.3 percent in the first.

Anecdotal evidence suggest the economy began the second half of the year in an even more fragile state.

Purchasing managers’ surveys show the manufacturing sector contracted last month at its sharpest pace in a decade while construction activity tumbled at its fastest rate since records began in 1997.

The services survey showed the input price index eased to 70.2 from 71.7 in June but it was still the second highest on record. The prices charged index was little changed at 55.9 from 56.0 and remains significantly higher than it was last year, showing companies were prepared or obliged to pass on some of their increasing costs despite weakening demand.

(Editing by Ruth Pitchford, Swaha Pattanaik)