UK construction activity declined last month at its fastest pace since June, as the sector suffered its steepest drop in new work since April 2009 and housebuilding recorded its sharpest contraction for two years, a key survey shows.

The drop in incoming new work, which is a forward- looking indicator, signals an extremely difficult outlook for the construction sector. And it highlights the challenges the broader UK economy will face in 2013, amid weak business and consumer confidence and public spending cuts.

The survey, from the Chartered Institute of Purchasing and Supply (CIPS), also reveals construction companies' expectations that their clients' budgets will be even tighter in 2013. CIPS' seasonally adjusted purchasing managers' index for construction dropped from 49.3 in November to 48.7 in December – signalling an acceleration of the rate of decline in the sector's overall output to the fastest pace since June.

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This index has now been below the level of 50, which is calculated by CIPS to separate expansion from contraction, in four of the past five months.

CIPS noted that, while some survey respondents had suggested poor weather in December had led to unusually lengthy seasonal shutdowns at their units, most companies cited weak underlying demand at the end of 2012.

It added that housing was "by far the weakest performer" of the three construction sub-sectors in its survey. Residential construction output has now contracted for seven consecutive months.

Commercial property construction showed its fifth straight monthly decline.

However, there was moderate growth in civil engineering activity last month.

Amid the tumble in new business, CIPS' survey recorded a third consecutive monthly decline in employment in the UK construction sector.

CIPS said of the drop in incoming work for UK construction firms: "Anecdotal evidence widely cited strong competition for a shrinking pool of new invitations to tender, amid a background of subdued business and consumer confidence."

CIPS chief executive officer David Noble described the drop in new work as huge, and added that it signalled trouble for the year ahead.

Tim Moore, senior economist at financial information company and CIPS survey sponsor Markit and author of the construction report, said: "December rounded off a miserable year for the UK construction sector, with output declining at the steepest pace for six months and new business intakes falling back at the fastest rate since April 2009.

"While some firms cited the unusually wet weather as leading to longer-than-expected seasonal breaks at the end of 2012, weak underlying demand remains prevalent.

"Survey respondents are also relatively subdued about the 2013 outlook, amid reports from their clients that budgets will be under even greater pressure over the year ahead.

"A sharp and accelerated downturn in housing activity was the most striking feature among the overall weakness shown by December's PMI survey. The pace of contraction in residential building was the strongest since the snow-related drop two years previously, and the extent of the decline made December 2012 one of the worst months for housing activity since the spring of 2009."