Growth in the services sector all but dried up last month, sliding to a five-year low as companies struggled against the sharpest rate of cost inflation on record, a survey showed yesterday.

Confidence in the sector fell to its lowest since the aftermath of the attacks on the US in 2001, with fears intensifying about the impact of the credit crunch on the economy beyond the hard-hit financial sector.

The Chartered Institute for Purchasing and Supply/NTC purchasing managers' index fell to 50.4 from 52.1 in March, the lowest reading since March 2003 and below analysts' forecasts for a reading of 51.6. Any reading above 50.0 indicates growth, while anything below 50.0 indicates contraction.

The input price index rose to 67.3 last month from 66.2, indicating a record rate of cost inflation as firms contend with higher fuel and good costs as well as rising wages and a weaker exchange rate.

The rate at which companies are hiking prices eased slightly, albeit still remaining relatively strong, with the prices charged index slipping to 55.2 from 56.2.

Further evidence of slowing economic activity - the services sector makes up nearly three-quarters of the economy - alongside strong price pressures will do little to simplify the conundrum facing the Bank of England in setting interest rates. Policymakers are under pressure to cut rates further soon to shore up the economy but several members of the Monetary Policy Committee have made it clear they are growing increasingly concerned about inflation.

The Bank is widely expected to wait until next month before trimming rates for a fourth time since December to 4.75 per cent.

"With demand showing signs of faltering in line with the economic uncertainties created by the credit crunch and spending being squeezed by the seemingly relentless rises in costs, growth of activity perhaps unsurprisingly stalled during April," said Paul Smith, NTC economist.

"As sentiment fell to its lowest since 9/11 (attacks on the US), the latest data therefore add to the arguments of those looking for a further loosening of monetary policy."

The business expectations index slipped to 65.3 from 65.8 in March - the lowest reading since October 2001.

"Confidence continued to be undermined by the credit crunch and worries over its negative effects on the economy (such as a depression of spending)," CIPS/NTC said.

"Moreover, concerns persist over margins as input cost inflation shows little sign of abating, whilst weakened demand is placing downward pressure on pricing power."