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Business confidence has seen its biggest drop since the dot.com crash, a study shows.

The latest business trends report from accountants BDO Stoy Hayward, which pulls together the results from other surveys, found business confidence has tumbled from 100.0 in July to 97.4 in August.

This is the biggest drop in medium-term confidence levels, which measures confidence two quarters ahead, since the era of the dot.com crash, BDO Stoy Hayward said.

Similarly, the output index, which measures short term business confidence, also dropped sharply from 97.2 in July to 95.2 in August, the lowest level since 1991 when the country was in the midst of a recession.

Peter Hemington, partner at BDO Stoy Hayward LLP, said: "The dramatic drop in our optimism index, which has previously remained unexpectedly high, suggests that the reality of the situation is now hitting home.

"This double blow for UK business confidence will intensify pressure on the MPC to cut rates, but with the inflation index still edging up, the Bank of England may well exercise caution and leave interest rates unchanged this month.

"However, if inflation reaches its peak in the next three months and starts to ease off as expected, this could be the opportunity the monetary policy committee (MPC) has been looking for to make its move and cut rates before the end of 2008."

The inflation index for August edged up once again from 115.2 to 115.4 - close to the record high of 116.0 in March 2008.

This indicates that despite oil prices easing, firms still expect to pass on hefty price increases to consumers in the short-term as they attempt to re-build margins which have been eroded by rising input costs.