Although the rate of slowdown was not as large as in previous months, the survey by the Chartered Institute of Purchasing and Supply (CIPS) paints a gloomy picture for jobs. Employment fell for the tenth successive month, with manufacturers continuing to shed staff at a rate not seen since 1992.

Exporters have been hard hit by the strength of the pound

The slowdown in orders was blamed on a continued lack of competitiveness in export markets due to the exchange rate, cheap imports, weak domestic demand and slower economic growth in Europe and the Far East.

December's decline was the third largest monthly fall recorded since the survey began in January 1992.

The CIPS's purchasing managers index inched up to 42.8 in December from 41.7 in November. But a reading below 50 still means that manufacturing is shrinking fast.

The CIPS says there is some evidence that the slowdown is beginning to ease

The survey said output also fell again, at its second fastest rate in the history of the survey. But the CIPS said there was some evidence the rate at which orders were shrinking may have bottomed out in October helped by the recent depreciation in the value of sterling.

The export orders index rose to 42.2 in December from 38.9 in November.

Also out on Monday were figures from the Bank of England which showed UK net consumer credit rose £1.3bn in November.

Interest rates on hold?

Economic experts said the figures may prevent the Bank of England from cutting interest rates on Thursday.

Marian Bell of the Royal Bank of Scotland said: "The UK figures are likely to increase the likelihood that the Bank of England will leave rates on hold after their meeting on Thursday. Net new formation of consumer credit was a very strong £1.3bn, whilst the manufacturing PMI rebounded to 42.8 broadly in line with our forecast."

He stressed, however, that he and his colleagues felt that "the Bank has room to continue to cut since our analysis shows that interest rates are still likely to be exerting a negative influence on gross domestic product growth."

Jeremy Hawkins of Bank America agreed that the unexpectedly strong gain in UK consumer credit in November may be enough to keep base rates on hold this week.

Will the Bank of England cut interest rates - or keep them on hold?

He added: "Recent anecdotal evidence of consumer spending has been mixed, but the £559m jump in borrowing on credit cards warns that the overall Christmas period may not have been as weak as suggested by some.

"The PMI for the manufacturing sector was consistent with the CBI trends report in calling for some stabilisation. Nonetheless, it is a sector that is still struggling badly. We see base rates being cut by another 50 basis points at the February MPC meeting."

Meanwhile Jeremy Stretch of NatWest GFM London said the manufacturing figures were no great surprise: "We have seen manufacturing struggling for a number of months now.

"Employment is now being hit and that will be a continuing theme through 1999. If that feeds through into consumer expenditure, it will exacerbate the slowdown.