In the past three months, 16% of firms had seen a rise in new orders but 46% said they had fallen, the CBI's Industrial Trends survey said.

It also found orders for UK-made goods had declined at their fastest rate since 1999 as domestic demand fell.

The outlook for the economy has been hit by the global financial crisis.

In total, 60% of the 525 manufacturing firms which took part in the survey were less optimistic about the general business situation than three months prior.

Further problems

The drop in new orders was largely due to weaker domestic demand, which recorded its sharpest fall since 1992.

The credit squeeze is also having a considerable effect on the prospects for manufacturers' businesses as they encounter greater lending problems.

Many firms planning to reduce spending on machinery and buildings over the next year and the number looking to cut back is the highest since the early 1980s. Some 9% said output was likely to be limited by credit or finance difficulties in the coming three months.

Prospects for employment are not any rosier and many manufacturers foresee making job cuts. In total, the CBI predicts 23,000 manufacturing jobs will be shed in the third quarter and that this number will increase to 42,000 in the fourth quarter.

Meanwhile, firms' perceptions of their total order book levels deteriorated over the quarter to their lowest point since 2003.

'Economic turbulence'

"This survey was conducted during a period of exceptional economic turbulence, so it is unsurprising that confidence has taken such a hit," said Ian McCafferty, the CBI's chief economic adviser.

"However, the sharp falls in orders and output show that the slowdown in the UK economy is now spreading to sectors previously resilient to the weakness in the banking and housing markets.

"It is also of serious concern that constraints on capital now appear to be affecting manufacturers, in a way that had not been the case earlier."

He said that he hoped the recapitalisation of banks and the recent cut in interest rates would prevent a further credit squeeze over the winter.

The muted results will do little to cheer those who are predicting similarly downbeat results from new GDP figures, to be released on Friday.

If, as several experts expect, UK GDP contracts, it will be the first decline in 64 consecutive quarters and the first time the UK has slid into negative territory for 16 years.

This will stoke further fears that the UK is heading towards a recession.

"The sharp manufacturing downturn and substantially reduced price pressures evident in the CBI survey heightens the case for the Bank of England to cut interest rates aggressively again in November," said Howard Archer, economist at Global Insight.

The Bank of England cut rates earlier than was expected this month, together with several other central banks across the world, including the US Federal Reserve.

BBC