Slowing rates of economic growth, announced by the British Chambers of Commerce (BCC) has prompted worries about a double-dip recession.
The BCC estimates that the economy expanded by 0.4%-0.5% in October-December, which is down on the latest official growth figure of 0.7% for July-September.
Although manufacturing output was up strongly, the BCC said that the reduced output was a result of service sector weakness.
David Frost, BCC director general said: "The manufacturing sector is growing very strongly and is a star performer, but the service sector is undoubtedly acting as a drag.
"The manufacturing sector is being driven by exports, not least to the growth areas on the far side of the globe, but the service sector is suffering from a lack of confidence with consumer spending being reined in."
The BCC's findings come on the same day that the British Retail Consortium (BRC) said sales on the UK High Street fell last month compared with a year earlier.
The BRC said sales in December 2010 on a like-for-like basis were 0.3% lower than the same month in 2009.
David Kern, BCC chief economist, said: "The disappointing performance of the service sector is disturbing, particularly as we are yet to see the full impact of the VAT increase, and deficit-cutting measures on these firms.
"Unless reversed, weaknesses in services could have adverse consequences, particularly for jobs."