Services firms saw "alarming" declines in the second quarter of 2008, with those reporting lower orders outnumbering those recording rises for the first time since 1990, its survey of almost 5,000 firms found.

The BCC also warned the Government against hitting firms with more taxes in an effort to boost public revenues as the economic gloom grows.

Director-general David Frost said: "The temptation for the Government will be to raise business taxes because the exchequer is running out of money. This would be a catastrophe.

"To put more pressure on business would not only restrict growth and hit the consumer hard, it would further crush what our economy is based on - confidence."

Confidence among services firms - which account for almost three-quarters of the economy - is also at its lowest ebb since 1990, the survey added.

The BCC's economic adviser David Kern said the survey showed a "menacing deterioration" in UK prospects.

He added: "The outlook is grim, and we believe that the correction period is likely to be longer and nastier than anticipated."

Firms are facing soaring costs from rising electricity bills and raw materials as oil approaches 150 US dollars a barrel, while banks hit by the crunch clamp down on lending. This has put cashflow among UK firms under the most pressure since 1992, the BCC said.

Mr Kern added: "A major recession can still be avoided, but forceful measures are needed to improve confidence. The MPC must resist misguided calls for higher interest rates. Indeed, if wage pressures remain muted, the option of early interest rate cuts must be considered."