Manufacturers continued to be battered by the strong pound with activity in the last quarter hitting its lowest level for a year.

The British Chambers of Commerce's quarterly economic survey said big and small businesses were being squeezed by the strength of the pound.

But in contrast the service sector continued to soar, expanding at its fastest rate since the end of 1997.

The BCC's survey showed even the largest manufacturers being hit hard by the slowdown, with export sales contracting for the first time in a year and businesses warning they expected the decline to continue.

Pressures on prices were at their highest level since the second quarter of 1997.

Dr Ian Peters, BCC deputy director-general, said there was currently a two-speed economy but if manufacturers continued to suffer there would inevitably be a knock-on to the service sector.

The Bank of England's monetary policy committee had been right to hold interest rates at six per cent, Dr Peters said, but he predicted rates would have to come down by the end of the year.

He also warned manufacturing might not have hit the bottom yet, with smaller companies continuing to be squeezed by their large clients to drive down prices.

"There is the potential for many more smaller businesses to go to the wall before we have turned the corner," he said.

On employment, manufacturers said the number of new staff they were taking on was barely growing, although they did expect to take on more in the future.

In the service sector, job expectations were at their highest for 11 years.

In both sectors, investment in plant and machinery picked up in the last quarter but investment in training slowed.