The government reallocates £60m to boost tourism
Spending by overseas tourists will fall by nearly 20%, according to the British Tourist Authority (BTA).
And the situation could get worse putting 75,000 jobs at risk, if military strikes are launched.
The BTA issued its stark warning as ministers met with tourism leaders on Wednesday afternoon to discuss action to aid the industry's recovery.
Tourism Minister Kim Howells announced that £60m left from the £300m originally allocated to help businesses affected by foot-and-mouth would now be given to those worst affected by the attacks on America.
Overseas visitors to Britain are forecast to spend £10.8bn this year, rather than the £13bn originally predicted, says the BTA which promotes Britain abroad.
And visitor numbers from the long-haul markets of USA, Canada, Australia, Japan, New Zealand, India and Singapore will fall between 15-25% in the last quarter of 2001, it warns.
BTA's deputy chief executive Sue Garland told BBC News Online that many within the tourist sector feared going out of business.
"The combined effects of foot-and-mouth and the US situation has meant that the whole industry has had a very difficult time," she said.
She said while foot-and-mouth had hit the rural tourism industry hardest, the US terror attacks had had an impact more on London and the south-east.
But York, Stratford-upon-Avon, Oxford, Edinburgh, Cambridge, Chester and Bath have also been badly hit.
Already some of BTA's campaigns have been cancelled while others have been postponed since the terror attacks.
"You can only do so much in a time of uncertainty.
"Everyone is waiting to see what happens next and what form any reprisal will take."
BTA's chairman David Quarmby predicted that the situation could worsen, with about 75,000 jobs put at risk, if military action was launched.
The latest figures are based on information from the BTA's overseas offices and consultations with industry partners.
Safe destination
Ms Taylor was cautiously optimistic that Europe could benefit from travellers visiting the UK, Ireland, France, Spain and Italy, rather than flying long-haul or to potential combat zones.
But he added: "I want to assure people that the UK remains one of the safest countries in the world.
"We have a great record of ensuring people's safety, all the things that have always attracted visitors are still here and there may now be some bargains to be had."
BTA has initiatives planned to boost UK tourism next year, including highlighting the Queen's Golden Jubilee and the Commonwealth Games.