The manufacturing sector contracted in June at its sharpest pace since 2001 while house prices fell for an eighth straight month, according to figures on Tuesday that darkened an already bleak economic outlook.

Worries about stuttering economic growth and rising inflation have already led analysts to downgrade their growth forecasts.

Some are now openly talking about the risk of recession.

"The news just goes on getting worse for the UK economy," said Michael Saunders at Citigroup.

"Yesterday saw plunges in consumer confidence and mortgage approvals. Today has brought another sharp fall in house prices plus signs that manufacturing activity is heading into recession."

The Nationwide building society said prices slipped 0.9 percent last month after a 2.5 percent drop in May which had been the sharpest fall since the series began in 1991. Prices were 6.3 percent down on the year, the biggest decline since December 1992.

Homebuilders and furniture retailers are already feeling the pinch.

Carpetright chairman Philip Harris, a 50-year veteran of carpet selling, warned on Tuesday that the coming year would be one of the most difficult he had ever seen.

Van hire company Northgate also delivered a profit warning in an ugly day for stock market traders as the top share index tumbled 2.4 percent.

MANUFACTURING CONTRACTS

Britain's manufacturing sector contracted last month at its sharpest rate since the aftermath of the 9/11 attacks on the United States as output and new orders fell at their fastest rate in almost a decade.

The Chartered Institute of Purchasing and Supply/Markit purchasing managers' index fell to 45.8 in June from a downwardly revised 49.5 in May, well below the consensus forecast of 49.8.

"The exceptionally large plunge in the manufacturing index is a worrying sign that the weakness of the financial and housing sectors is spreading to other parts of the economy," said Paul Dales at Capital Economics.

Declining activity led companies to lay off workers at the fastest pace since August 2005, suggesting tougher trading conditions have started to hit the labour market.

Sterling slipped after the figures as traders reckoned the Bank of England would think twice about raising borrowing costs when the economy was so fragile.

Still, money markets are pricing in no chance of interest rate cuts at a time when inflation pressures are building.

On this score, the manufacturing survey offered no comfort. Firms' input costs and their output prices both rose last month at the fastest rate since the series began.

"Bad news on the activity front was compounded by new series highs for both the inflation readings. All in all, a dreadful combination," said Geoffrey Dicks, an economist at RBS.