The financial services sector received a "sharp shock" at the end of 2007 as business volumes fell back at the fastest rate since 1991, according to new figures from the Confederation of British Industry (CBI) and PricewaterhouseCoopers (PwC).
Some 44 per cent of firms polled said business volumes fell back in the last three months of 2007, while just ten per cent saw improvements.
The slowdown was blamed on a drop in business to consumers backed up by recent figures from the Bank of England and to financial institutions.
However, the forecast for the availability of credit and business for the financial services industry is upbeat with demand from individual consumers expected to stabilise over the coming three months.
Despite the downbeat picture of the industry profits grew, but this is not expected to continue.
Ian McCafferty, CBI chief economic adviser, said: "After two years of strong growth there has been a clear turnaround within the financial services sector.
"The credit squeeze has delivered a sharp shock to business volumes over the past three months, and it seems that difficulties are likely to persist for some time yet.
"This is however a very resilient sector that sees better prospects over the horizon, and it is encouraging that profitability, job creation and investment plans are all still positive."
The credit crunch with inter-bank lending becoming more difficult following the US subprime crisis has particularly hit banks and building societies, the research shows.
John Hitchins, PwC UK banking leader, said: "The credit squeeze has led to a sharp fall in confidence in the banking sector.
"The lack of liquidity has dented business volumes and a steep rise in interest funding costs, as well as a fall in the price of some asset classes, has reduced profitability slightly."
However, some banks are predicting better conditions in coming months as those coming off fixed-rate mortgage deals will be remortgaging at higher interest rates.