New figures showed that commerce was facing hard times

Figures from the bosses' organisation CBI Scotland showed that fewer companies were optimistic about their prospects over the next six months.

Findings from the body's twice-yearly survey showed that more businesses were expecting a fall in domestic orders over the next year.

Spokesman Alan Mitchell warned that the challenge was to get more firms to compete internationally.

Economists said many firms had seen their profit margins fall significantly and some predicted they would decline further in the next 12 months.

These results again demonstrate how challenging business conditions are for Scottish firms Alan Mitchell CBI Scotland

Only a small proportion of companies expected to be able to pass on all their higher costs to customers and a third did not think they would be able to pass on any of the increases.

But employers were responding to the economic squeeze by investing heavily and at a higher rate than the UK average.

They were expecting over the next 12 months to pump more money into buildings, development, equipment and training.

Mr Mitchell said: "These survey results once again demonstrate how challenging business conditions are for Scottish firms in every sector.

'Cut red tape'

"Scotland's companies are rising to the challenge and investing for the future.

"The Scottish Executive and the UK Government must support them by reducing the red tape and regulation that businesses have again identified as the biggest, single obstacle to their growth."

Last month, official figures for 2004 disclosed that sales of goods made in Scotland's factories for export had fallen below �15bn for the first time since 1994.

Leaders of the Scottish Council for Development and Industry at the time called on ministers to invest more in research and development and improve transport links.