Employment intentions among UK businesses hit their lowest level in at least 11 years last month, according to a Bank of England report.

The Bank found that firms are reducing their workforces, cutting down on employee work hours and turning to temporary staff as they start to feel the direct impact of the credit crunch.

The monthly survey by the Bank’s regional agents – covering 650 companies across all sectors of the economy – revealed that employment intentions plunged to the lowest level since the study began in 1997, with the services sector the worst affected. The results paint a grim picture of UK business conditions, signalling a continued slowdown in consumer spending on both services and products, as well as a marked fall in activity in the services and manufacturing sectors.

The study also found that the crisis in credit markets that has been battering firms in the City has spilt over to other sectors.

The Bank of England agents’ summary of business conditions said that whereas previously firms had only noted an indirect knock-on effect from the credit crunch, there were now reports of "a wider range of companies being directly affected".

It described a "credit rationing" where lenders were clamping down on their lending and firms were becoming less likely to borrow for fear of their ability to repay the debt in the future.

Bank Governor Mervyn King has been keen to stress that it is not all doom and gloom in the regions, despite the woes seen in the City.

But the report suggests that the impact of the credit squeeze has spread across the UK, with the survey giving a more regional view of business conditions.

The report also found that consumer spending was now well below its levels six months ago.

Retail, fashion, homewares and leisure goods were seeing the biggest spending declines, although the food sector showed some resilience with the value of sales boosted by soaring food price inflation.

The Bank’s survey also showed that consumers were curbing spend on services such as hotels, clubs and restaurants and holidays.

Service sector output fell to its lowest level in more than four years in April, as firms in areas such as business catering and logistics joined the finance sector in feeling the heat from the crisis in wholesale credit markets.

There were also further worrying inflation indicators for the Bank’s interest rate-setting Monetary Policy Committee, with results showing that manufacturers had become "more active" in raising their prices, while retailers were also increasingly passing on cost pressures to consumers.

"More large retailers indicated a reluctance to continue the depth of discounting of recent months, claiming that customers were becoming 'immune’ to such discounts", said the report.

The study is compiled from discussions held between the Bank’s agents and firms each month. The Bank has agents across the UK, spanning Central Southern England, the East Midlands, Greater London, the North East, the North West, Northern Ireland, Scotland, the South East & East Anglia, the South West, Wales, the West Midlands & Oxfordshire and Yorkshire & the Humber.