The indicators, from the closely-watched Institute of Supply Management and showing the first contraction in US non-manufacturing businesses since January 2002, came as a shock to observers.

The March data showed that the economy was in trouble even before the US launched the current war in Iraq, some observers said.

Thursday also brought jobs data, showing the biggest one-week spike in the number of Americans claiming on unemployment insurance in a year.

Gloomy prognosis

Despite the numbers, the Federal Reserve remains confident that the uncertainty dogging both the economy and the markets will fade once the hostilities are over.

But many economists believe that since the problems of over-supply, under-investment, slumping consumer confidence and the persistent after-effects of the 1990s bubble predate the war, any post-war boost will prove strictly temporary.

"There's underlying weakness in this data," said Drew Matus, economist at Lehman Brothers in New York.

"Things just aren't getting better."

The ISM survey's index of non-manufacturing activity fell to 47.9 in March from 53.9 the month before, making March the worst reading since October 2001, just after the 11 September attacks on the US.

It was also the first time since January last year that it strayed below 50, the cut-off point between expansion and contraction.