The economy all but ground to a halt in the past three months, sparking warnings that over the present quarter it may shrink - for the first time since 1992 - taking it to the brink of recession.

Economists said that the odds on Britain sinking into recession rose sharply yesterday after official figures showed that economic growth dropped to a meagre 0.2 per cent in the second quarter (Q2), from an already lacklustre 0.3 per cent in the previous three months.

The sharp slowdown in growth was fuelled by a collapse in construction industry activity as the house price slump undercut homebuilding, and as the industrial sector sank into recessionary territory, with its output down for a second quarter in a row.

Construction output plunged by 0.7 per cent in Q2, in the sector's sharpest decline since autumn 2005, and would have fallen still more sharply but for a substantial rise in government infrastructure projects.

In industry, overall output in Q2 fell by 0.5 per cent, after a 0.2 per cent drop in the previous quarter, while manufacturing production alone fell by 0.4 per cent, wiping out the gain registered by the battered sector during the previous three months.

Growth in the past quarter was also hit by a 1.5 per cent drop in utilities output, and a 0.9 per cent decline in the mining industries, driven by a drop in North Sea oil extraction.

Overall, the 0.2 per cent rise in GDP in Q2 was the economy's weakest performance for three years. The slowdown cut Britain's annual growth rate to just 1.6 per cent, down from 2.3 per cent in the first quarter and less than half the 3.3 per cent pace recorded for the same period last year.

City economists sounded warnings that there was still worse to come. Paul Dales, of Capital Economics, said: “An outright recession remains our central scenario.”

Second-quarter growth was buoyed by a modest rise in the quarterly growth rate of the vast services sector, three-quarters of the economy, to 0.4 per cent, from 0.3 per cent in the previous three months.

Yet this glimmer of hope relied substantially on a surge in growth in the transport and communications industries that economists said looked erratic and could soon be revised away. Even with this, annual services growth in Q2 still slowed to 2.1 per cent, its weakest since the end of 1992.

Prospects for the crucial services sector looked still worse as more timely monthly data showed that it shrank in May, with output dropping by 0.1 per cent, having been dragged down by financial activity and the distribution industries, including retailing, as well as the leisure and recreation sector.

In Q2, the fortunes of services businesses were mixed. Business services and finance, including the City, saw growth of just 0.1 per cent, while distribution, hotels and catering grew by only 0.2 per cent.

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