UNITED Kingdom services from banks to airlines contracted last month by the most since October 2001 and banks expect to curb lending further in the third quarter, adding to evidence that Britain is edging closer to a recession.

An index based on replies from about 700 service companies fell to 47.1 in June from 49.8 a month earlier, the Chartered Institute of Purchasing and Supply told Bloomberg News yesterday.

A reading below 50 shows contraction. A Bank of England survey showed banks plan to reduce the availability of credit to consumers and businesses this quarter.

The slowing UK economy has pushed the benchmark FTSE 100 Index close to its lowest level in three years. Banks' reluctance to lend is dragging down the housing market, while oil prices are surging and consumers are pulling back on spending. While Bank of England Governor Mervyn King says the UK may contract, faster inflation makes it harder for the bank to cut interest rates.

"We are at serious risk of a recession," said Alan Clarke, an economist at BNP Paribas SA in London. "What we're facing is a prolonged, elongated slowdown, especially with no helping hand from the Bank of England in the shape of rate cuts."

Pound dips

The pound dropped after yesterday's releases. It fell as much as 0.2 percent to 79.98 pence per euro and declined by the same amount against the greenback to US$1.9859.

Signs are increasing that the slowdown is worsening as banks keep a grip on lending after last year's credit-market rout.

UK manufacturing contracted in June by the most since 2001 and Nationwide Building Society says house prices dropped 6.3 percent, the worst annual decline since 1992.

Royal Bank of Scotland Group Plc on June 27 had its rating cut by Moody's Investors Service because of the risk of defaults. Marks & Spencer Group Plc lost a quarter of its value on Wednesday after saying trading conditions won't improve for two years.

While yesterday's services figures exclude retailers, the industry as a whole accounts for three-quarters of the economy and manufacturing 15 percent. "The figures are really bad news," said Alex Garatti, UK economist for Natixis SA, after the services figures were released. "It shows the UK is really suffering from tightening financial conditions and the slowdown in housing."

Lending restrictions are exacerbating the slowdown as banks refuse to pass the Bank of England's three rate cuts since December on to consumers and businesses.

Financial institutions also expect spreads on corporate debt to widen.