UK business confidence slipped to its lowest level in three years during the final three months of 2001, according to a survey from employers' association the Institute of Directors.

The balance of companies which were more rather than less optimistic about their prospects fell to 10% in December, from 23% in October, the IoD said.

The drop in confidence was due to a decline in production and a slump in new orders.

The balance of firms reporting higher output during the three-month period fell to 33% from 38% in September, while the balance of respondents reporting a decline in new orders widened to 17% from 1%.

Manufacturers, hit by slowing export demand due to the global slowdown and the euro's weakness against the pound, reported a particularly steep drop in new orders.

"The manufacturing sector continues to underperform the rest of the economy, reflecting its exposure to difficult overseas trading conditions and the weak euro," said Ruth Lea, head of the IoD's policy unit.

However, the IoD said that aggressive interest rate cuts by the Bank of England last year coupled with rising public spending should stave off a recession this year.

"We would be surprised to see further cuts in interest rates, but given the benign inflationary climate we do not expect to see major tightening this year," said Ms Lea.