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Current turmoil on the world's financial markets has seen UK business confidence fall to the lowest level since November 2005, new figures have indicated.

According to the latest monthly index published by business advisors BDO Stoy Hayward, business confidence experienced a "sharp" fall in August.

The index, which measures expectations for the next six months, fell to 101.2 this month, down from 101.9 in July.

BDO said that while its optimism index remained above the crucial 100 mark, which indicates expansion, further fallout is expected next month – when the full impact of ongoing market turbulence is expected to become apparent in business surveys.

It added that while business optimism has been decreasingly slowly since July 2006, recent developments on the financial markets appear to have "accelerated" the trend.

Share prices across the globe have been fluctuating wildly this month as a result of fears of a possible credit squeeze – prompted by rising default levels in the US sub-prime mortgage market.

Some analysts have subsequently predicted that interest rates in the UK may be kept on hold in order to ease the situation, but BDO warned that the Bank of England was likely to remain focused on tackling inflation - despite an across the board fall in business confidence.

Both small and large businesses saw confidence slump this month, as did those in both the manufacturing and service sectors.

However BDO stressed that the current market volatility was unlikely to persist over the medium term, adding that China and India continue to be strong drivers of the world economy and that economic conditions in Europe and the US are "relatively benign".

As such, it predicts that in the coming months the Bank of England may opt to raise the benchmark interest rate from its current 5.75 per cent level.

BDO partner Peter Hemington said: "Our data shows that whilst UK business confidence has been knocked, it is still expanding overall.

"Therefore the Bank can afford to remain focused on tackling inflation and we believe that a further rate rise toward the end of the year may be on the cards," he added.