Business confidence in the financial services sector has fallen for the first time in 18 months.

The Confederation of British Industry's quarterly financial services survey found 16 per cent of firms were less confident about the state of business compared with three months ago.

Of the 138 companies questioned, 10 per cent were more optimistic, giving a negative balance of six per cent.

This compared with a positive balance of 36 per cent last March and 44 per cent a year ago.

The drop in confidence reflected a slowdown in business volumes growth, with rates of growth at their slowest since December 1997.

Building societies reported the sharpest falls in business volumes, with securities traders and life insurers also reporting falls.

The key factor driving the loss of confidence among building societies was the impact of increased costs on profitability, with costs now at their highest since December 1998.

The survey, conducted in conjunction with PricewaterhouseCoopers, also showed banks anticipated the most job cuts, while building societies, securities trades, general and life insurers also expected cuts would have to be made.

Sudhir Junankar, CBI associate director of economic analysis, said: "Confidence has taken a knock as growth in business volumes has fallen from its peak and profits are set to increase more slowly.

"Firms are becoming increasingly concerned about the level of domestic competition and its likely impact on business over the coming year.

"With our surveys also pointing to a modest retail sales growth, this is further evidence the Bank of England's decision to keep rates on hold last week was the right one."