The IoD used the findings - revealed in its latest quarterly survey of business opinion - to keep up the pressure on the Bank of England to reduce interest rates.

The result adds to a growing body of data pointing to an economy slowing quickly, with many observers saying a recession is now likely.

Ruth Lea, head of the policy unit at the IoD said: "The deterioration in confidence is such that we need a further quarter point cut in interest rates."

The IOD wants the bank of England to reduce interest rates further

The survey of IoD members in the three months to September found that optimists out-numbered pessimist by just 2%, down from 19% in the last quarter and down from 51% in March.

The gloomy outlook was most pronounced in the manufacturing sector where the pessimist outnumber the optimist by 19%.

The continuing fall in business confidence comes despite findings from the same survey which show a large number of companies doing well.

Directors saying their business was performing well outnumbered those saying performance had declined by 77% - a marginal increase on last quarter's 76%.

But the IoD's report warned against assuming good performance today meant the future was bright.

"Whilst the overall performance measure provides some reassurance as to the underlying strength of the economy there are no grounds whatsoever for complacency. Our survey shows that order books are deteriorating sharply."

Economy out of step

The survey provides more evidence that Britain is a two-speed economy.

While confidence is plummeting in the manufacturing sector particularly among exporters, most service companies are still confident that business will get better.

The IoD's survey also measures efficiency in companies by asking whether they are working to full capacity. Most directors survey said their business was not working to full capacity with manufacturing once again the worst effected.

The decision last week by the Bank of England Monetary Policy Committee to cut interest rates by 0.25% to 7.25% was broadly welcomed by business although the IoD had been calling for a cut of 0.5%.

The MPC had resisted calls for a cut with most of its members fearing that inflation had not been squeezed hard enough.

The IoD's business opinion survey's questions on prices found the balance had shifted over the last quarter with marginally more companies saying they had cut prices than had raised them.