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Financial firms have reported a rise in job cuts over the last quarter as operating costs rise and the credit crunch bites, according to research.

The latest Financial Services Survey from the Confederation of British Industry and PricewaterhouseCoopers found a dip in profitability for the sector, after holding up last quarter.

The balance of 18 per cent of firms reporting a fall was a weaker figure than expected and the most negative since March 2003 (-19 per cent).

Meanwhile, a net 25 per cent of respondents said they had cut jobs over the past three months, which is the highest rate since March 2003 and against expectations that numbers employed would increase marginally.

Firms' expectations for employment over the next few months (a balance of 33 per cent expecting numbers employed to reduce) were the weakest since December 2002.

Even more firms think the credit squeeze will be more prolonged than did so three months ago – 90 per cent believe it will last longer than six months compared with 70 per cent last quarter despite firms being a further three months into its effects.

Nearly all businesses (97 per cent) believe that credit conditions will get worse in the next six months – 35 per cent said it was a 'high' likelihood and 62 per cent saying it was 'medium'.

Ian McCafferty, CBI chief economic adviser, said: "While liquidity injections and interest rate cuts by the Bank of England will help shore up the system, neither will solve the fundamental problem of restoring trust within the markets.

"We can expect further tough times in the financial sector, as this feeds through into the wider economy, will inevitably be felt through slower economic growth this year and next."

Business sentiment among financial services firms has continued to worsen, and a balance of 29 per cent reported that they are less optimistic about the overall business situation in their sector than they were in December.