Service companies such as retailers have done well

The net rate of return on non-financial British businesses in the first three months of 2007 was 15.1%, down from 15.2% in the previous quarter.

Separately, inward investment grew by 17% in 2006/07, the government said.

The 1,431 projects created more than 36,000 new jobs, with China and India playing an increasing role.

'Robust manufatcuring'

The profitability figures were "extremely healthy", said Howard Archer, chief UK economist at Global Insight.

The recent rises in interest rates will hit profits eventually via their impact on demand in the economy Roger Bootle Economist to Deloitte

Lower oil prices had helped firms boost the bottom line, while companies had also been able to limit wage increases, he said.

He added that the manufacturing sector had been squeezed by tough competition, which made it difficult to raise prices.

"Nevertheless, recent survey evidence indicates that manufacturing activity has been pretty robust and that they have become more confident in their pricing power," Mr Archer said.

And Roger Bootle, economic adviser to Deloitte, said that there was scope for even larger profits.

"The recent rises in interest rates will hit profits eventually via their impact on demand in the economy," he said.

"But in the meantime, easing cost pressures and rising price power could give profitability a further uplift."

The inward investment data came from the Foreign and Commonwealth Office, as well as the newly-formed Department for Business Enterprise and Regulatory Reform which has replaced the DTI.

"The 17% increase demonstrates that the UK's proposition - with its business-friendly environment, political and economic stability, world-class creative talent and strong research and development base - continues to act as a powerful magnet for foreign investors," they said.