The UK is facing a serious risk of recession within months, the findings of a survey of almost 5,000 small, medium and large businesses suggest.
The British Chambers of Commerce's (BCC) quarterly report found the credit crunch and rising costs had dented the most important sectors of the economy.
It came as the FTSE 100 stock index briefly dipped into a "bear market".
Prime Minister Gordon Brown said he was the right man to steer the UK economy through "difficult times".
Global stock indexes have also fallen amid concerns about the global economy.
WHAT IS A RECESSION?
There are a number of definitions of a recession.
The most commonly used one is when there are two quarters in a row of economic contraction, or negative growth.
But it is quite possible to have two quarters of negative growth and another couple of quarters of decent growth - so the economy actually grows year on year, despite going through a technical recession.
Q&A: What is a recession?The gloom surrounding the UK economy has been amplified by a string of further developments including:
Grim outlook
Firms in the manufacturing and services sector said domestic sales and orders had slowed over the past three months, said the BCC, which added that firms were also experiencing serious cash-flow problems.
Its economic adviser, David Kern, said the survey showed a "menacing deterioration" in UK prospects.
"We are now facing serious risks of recession," he said.
"The outlook is grim and we believe that the correction period is likely to be longer and nastier than expected."
There are a number of definitions of a recession, but the most commonly used one is when there are two quarters in a row of economic contraction, or negative growth.
Services firms, which include restaurants, gyms and tour operators, have been particularly hard hit, the BCC reported.
Sales and orders, job expectations and confidence in this sector had hit their lowest levels since the recession of the early 1990s.
The BCC's director general David Frost said the report was deeply worrying.
"I am sending Alistair Darling and Gordon Brown a strong message from the businesses I meet every day up and down the country," he said.
"To put more pressure on business would not only restrict business growth and hit the consumer hard, it would crush further what our economy is based on - confidence."
Mortgage drought
The report is likely to add to the wave of pessimism sweeping across the business world, from retailers to house builders.
Last week, the housing market suffered another blow when the Bank of England said mortgage approvals had plunged by 28% in May and were 64% lower than a year earlier.
HAVE YOUR SAY
House builders are cutting jobs and offices as the property slump continues. Before the news of the job cuts at Persimmon, rival builders Taylor Wimpey and Barratt Developments had announced 2,000 redundancies in the past week.
The mortgage drought has meant many people have been unable to secure the finance they need for a new home, while falling property prices have also put people off buying.
There was more bad news for the economy on Monday, when official figures showed that industrial output was falling at its fastest rate for more than a year.
Meanwhile, Marks and Spencer sent shivers across the retail sector last week when it reported a shock downturn in sales.
Some economists believe the chances of a recession in the UK are now 50:50.
They had hoped the slowdown in the economy would eventually reduce inflation, without turning into full-blown recession.
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