The British economy lurched ever closer to recession today, after the key services sector buckled under the pressure of rising costs and falling demand.

Firms in the sector - including hotels, restaurants, stockbrokers and insurers - slashed jobs last month as they looked to cut costs in the face of record oil prices and a sharp slowdown in business.

A survey by the Chartered Institute of Purchasing and Supply (CIPS) showed its measure of activity for the sector, where 50 marks the cut-off between boom and bust, fell to 47.1 in June.

It followed record declines in the manufacturing and construction sectors last month, but the contraction felt by services firms will cause most alarm. The sector is seen as the driving force of the economy, accounting for more than 70% of output.

David Page of Investec Securities said: "This is one of the key indicators of the UK economy and the decline really does start to worry us that the economy will fall into recession."

Paul Smith, senior economist at Markit Economics, which wrote the report with CIPS, said: "Following on from the dreadful figures for both construction and manufacturing, the services report confirms the broad-based deterioration in UK economic activity.

"The issues facing the service sector are rooted in the dual shocks of the financial crisis and surging oil prices.

"Sentiment is down sharply and budgets are being eroded by escalating costs, with the net result in June the awful combination of a record fall in incoming new work and another survey-high rise in input costs."

The crisis in the sector has been highlighed by profits warnings from Walkabout bars owner Regent Inns and restaurants group Clapham House, the firm behind Gourmet Burger Kitchen and The Bombay Bicycle Club. Financial firms are also slashing jobs.

Roy Ayliffe, director of professional practice at CIPS, said: "Purchasing managers in the UK services sector saw conditions deteriorate further in June as they battled against a combination of intensifying inflation and weakening demand.

"Hotels and restaurants and financial services companies fared the worst with significant falls in new business.

"Of particular note was the dramatic effect soaring oil prices had on firms' operating costs, with suppliers pushing up prices to offset the pain they are feeling from soaring fuel and energy costs."