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Employment in the UK's service sector has hit a record low as firms struggle in the face of falling demand.

The Chartered Institute of Purchasing and Supply's (CIPS) index for the service sector hit 40.2 in December, close to November's series low of 40.1.

A figure of below 50 marks a contraction in the industry, and CIPS said on average the index has remained below this level for the whole of 2008.

The fall in new business led to a record shedding of jobs in December for the industry, which accounts for around 73 per cent of the UK's GDP.

Roy Ayliffe, director of professional practice at CIPS, said: "The festive period did little to bolster the service sector in December, with 2008 witnessing its poorest annual performance since data was first collected over twelve years ago.

"Understandably, companies reduced workforces further to reduce costs and brace themselves against what is expected to be a gruelling year."

The survey also showed firms have slashed their prices in a bid to encourage spending, highlighting the potential for deflation in 2009.

"Service sector activity is being hit very hard by the heightened financial sector crisis, the deep housing market downturn and markedly reduced consumer spending on services," said Howard Archer from Global Insight.

The weak data may encourage the Bank of England's monetary policy committee to slash interest rates again when they meet this week, Dr Archer added, with the base rate predicted to fall as low as zero per cent in 2009.