THE UK's dominant services sector turned in an unexpectedly strong performance in December, a key survey has revealed, but confidence among firms tumbled and evidence for the fourth quarter as a whole points to economic stagnation.

Meanwhile, a separate survey from the Bank of England yesterday highlighted a view among commercial banks that "factors such as the economic outlook and tighter wholesale funding conditions were expected to impact negatively on credit availability".

This could spell further trouble for UK economic prospects, putting a further dampener on already-stagnating activity at a time when swingeing public sector spending cuts and associated job losses will almost certainly act as a significant drag on output.

The Chartered Institute of Purchasing and Supply's business activity index for services jumped from 52.1 in November to 54 in December on a seasonally-adjusted basis, to signal the fastest monthly growth in this sector since July.

Expansion was fastest in the hotels, catering, and restaurants sub-sector, likely reflecting the impact of pre-Christmas nights out. There was also strong growth in the transport, storage, and communications sub-sector. CIPS' service sector survey does not include retail activity.

CIPS' report, produced by research company Markit, showed the UK service sector last month enjoyed its sharpest monthly increase in new business since July.

But Markit chief economist Chris Williamson emphasised that the all-sector index from CIPS' surveys of services, manufacturing and construction had in the fourth quarter registered its weakest reading since the second quarter of 2009. The UK was still in deep recession in the second quarter of 2009.

Mr Williamson said the reading of 51.8 for the all-sector index in the fourth quarter, down from 52.5 in the preceding three months, was on past experience "roughly consistent with a stagnation of gross domestic product".

Vicky Redwood, chief UK economist at consultancy Capital Economics, said: "A weighted average of the three surveys over the fourth quarter as a whole points to overall GDP doing little better than stagnating.

"What's more, the surveys do not have a perfect relationship with the official data and the falls in the hard data on industrial production and services output in October suggest that a contraction is still possible. Remember, too, that the CIPS surveys do not cover the high street, where spending has been fairly soft."

CIPS' services survey, in spite of the rise in activity signalled, showed only very marginal growth in employment.

And confidence among services companies about their level of activity in 12 months' time dropped sharply in December to match the two-and-a-half-year low recorded in September.

Highlighting a weakening UK economic trend over the course of last year, Mr Williamson said: "The flat picture for the fourth quarter represents a marked deterioration in performance since the 0.6% expansion recorded by official (GDP) data in the third quarter.

"However, the third-quarter expansion was boosted by a rebound from temporary disruptions to business in the prior quarter, notably the additional public holiday due to the royal wedding, and the PMI data suggest that the underlying trend has been one of a steady weakening over much of 2011."