Hopes of a recovery in the service sector have been dashed by lack of demand and weakening consumer confidence, according to an industry survey.

The sector - which includes hotels and restaurants, travel and entertainment - had hoped for a rise in business activity and value in the three months to August.

But a survey by the Confederation of British Industry (CBI) and Grant Thornton found this did not materialise, leaving many companies to predict further falls in the coming months.

The news contrasts with a separate report on the manufacturing industry which said output figures were at their highest level since May.

False dawn?

Hopes of a strong summer for the service sector were prompted by the last CBI and Grant Thornton quarterly survey, for the three months to May, which had found an unexpected rise in business value.

The hints of optimism previously expressed seem to be crumbling

Steve Edmonds, Grant Thornton

But as this failed to materialise, businesses and economists are now forecasting a gloomy end to the year.

Many businesses in the business and professional service area, particularly advertising agencies and managing consultancies, have revised forecasts downwards.

The companies worst hit in the last quarter were consumer services firms such as hotels and bars.

These now say they expect profitability to fall faster in the next three months than at any time in the last four years.

"The hints of optimism previously expressed appear to be crumbling, as weak trading conditions have continued with no immediate relief in sight," said Steve Edmonds at Grant Thornton

UK manufacturing continues recovery

However, a separate survey released on Monday found that the UK's manufacturing industry returned to growth last month.

The Chartered Institute of Purchasing and Supply's manufacturing activity index rose to 51.0 in August, from 49.1 in July.

A figure above 50 implies expansion, anything below that contraction.

The latest number was the best since May, and above expectations of about 49.4.

Are you being served?

The CBI said service sector findings indicated that consumers are spending their money shopping rather than on services.

Companies are now revising their expectations for a turnaround, particularly in the health and beauty sectors where confidence levels have fallen sharply.

Ian McCafferty, the CBI's chief economic adviser, said the results of the survey "are a setback for the for the service sector".

"Clearly we are on a long and difficult road to recovery", he added.

"There is a good case for leaving interest rates on hold for some time."