Fall in Christmas retail sales

The performance was worse than City predictions and reinforced expectations that the Bank of England will cut interest rates to 5.25% next month.

It also underlined the challenges facing retailers and the service sector in the year ahead, as consumers face up to rising energy and petrol costs, as well as the impact of recent hikes in mortgage interest payments.

Vicky Redwood, UK economist at Capital Economics, said the figures showed customers "shunned" the high street over Christmas.

She said: "We don't see things getting any better from here. House prices are falling, so are equity prices, utility prices are rising, confidence is at a 12-year low ... need we go on?"

The economist added that, although Bank of England monetary chiefs might wait to see how sales fared this month, "surely this is enough to cement a February rate cut and more cuts thereafter".

The Bank reduced interest rates in December, but voted for no change last week.

The seasonally-adjusted figures from the Office for National Statistics revealed the largest sales decrease since January, when the figure fell by 1.7%.

The largest contribution to the fall came from non-specialised stores - including department stores - where sales volumes decreased by 4.3%, the biggest decline since February 1994.

Marks & Spencer has been the highest-profile casualty of the slowdown, with like-for-like sales down by 2.2% in the third quarter of its financial year - the company's first drop in sales for more than two years. The drop in sales volumes came despite evidence of price cutting among retailers.