Fears of UK recession continued to mount yesterday when a closely-watched survey signalled the fourth consecutive monthly decline in activity in the dominant service sector.

Fears of UK recession continued to mount yesterday when a closely-watched survey signalled the fourth consecutive monthly decline in activity in the dominant service sector.

The Chartered Institute of Purchasing and Supply's survey, which also showed the fourth straight monthly decline in new orders in services, kept the pound depressed yesterday.

CIPS' service surveys, together with its reports on manufacturing and construction which have respectively shown four and six consecutive monthly declines in activity in these sectors, reinforce growing fears that UK gross domestic product could fall in the third and fourth quarters of this year.

Recession is defined as two consecutive quarters of contraction.

The CIPS service sector survey does not include retail, which appears to be under great pressure as consumer confidence tumbles amid tight credit conditions and fears of a significant rise in unemployment.

The Office for National Statistics heightened fears of UK recession on August 22 by revising GDP figures to show no growth at all in the three months to June 30.

Hetal Mehta, senior economic adviser to the Ernst & Young ITEM Club think-tank, said yesterday: "Services activity contracted for a fourth successive month in August according to the (CIPS) purchasing managers' index for services.

"With services accounting for three-quarters of the UK economy and other sectors also struggling, the UK economy is heading towards recession."

CIPS' headline business activity index for services rose from 47.4 in July to 49.2 in August - remaining below the level of 50 which separates expansion from contraction to show the fourth monthly decline.

The rise in the index did, however, signal a significant easing of the rate of decline. The reading for August which was published yesterday was the best since May, and ahead of the City's forecast of a figure of 47.0.

Service sector companies reduced employment for a fourth consecutive month in August, the CIPS survey showed. The rate of increase of prices charged by service companies eased to its slowest pace since April, but CIPS emphasised it was still "historically high".

The service sector survey was published as the Bank of England's Monetary Policy Committee began its latest two-day monthly rate-setting meeting. CIPS' surveys are watched closely by the MPC.

All 67 economists polled last week by news agency Reuters forecast the MPC would hold UK base rates at 5% when it concludes its meeting at noon today.

However, nearly half of UK economists now expect a cut in base rates by the year-end. The proportion anticipating a pre-year-end cut has been growing steadily as economic conditions have deteriorated.

Howard Archer, chief UK economist at consultancy Global Insight, said yesterday: "We suspect that this Thursday will prove premature for the Bank of England to cut interest rates. While we would not totally rule out a 25-basis point reduction to 4.75%, we believe that most MPC members will still be reluctant to cut interest rates at this stage given the fact that consumer price inflation, already at 4.4% in July, is set to move further above its 2% target over the next few months and could well reach 5% around October."

Touching on the rise in import prices and consequent upward pressure on inflation which will result from the weak pound, he added: "The current marked weakness of sterling also argues against an interest rate cut now.

"The Bank of England will want to send out the message that, while it recognises the increased danger of recession, it is not prepared to trim interest rates until it is confident that the combination of subdued economic activity and rising unemployment is starting to dilute underlying inflationary pressures."

Archer, who expects contraction in UK GDP in the third and fourth quarters to restrict 2008 expansion to 1.1% and now sees growth of just 0.1% next year, now expects a cut in rates in November.

He had thought previously that the MPC would wait until next year.

Sterling yesterday traded at its lowest level for nearly 12 years on its trade-weighted index, against a basket of currencies, for an eighth straight session.

The pound continued to slide against a resurgent dollar, falling as low as $1.7669 during yesterday's session. It is at its weakest against the US currency since April 2006.

Sterling remained on the ropes against the euro, trading close to record lows against the single currency.

According to forecasts published on Tuesday by the Organisation for Economic Co-operation and Development, the UK will be the only one of the Group of Seven leading industrialised nations to fall into recession this year.

In an interim assessment of the outlook for OECD countries, the Paris-headquartered think-tank predicts UK economic output will fall by an annualised 0.3% in the third quarter to September and by a further annualised 0.4% in the final three months of this year.

This forecast takes into account the impact of falling UK house prices.

The implied quarter-on-quarter falls in each of these three-month periods would be only about 0.1%, given the OECD's forecasts are annualised numbers. However, the UK is way behind the OECD's forecasts of respective annualised growth of 0.8% and 0.7% in the third and fourth quarters in the G7 as a whole and significantly adrift of its 0.4% and 0.8% projected expansion in the 15-nation eurozone.