The Bank of England and the Treasury are under increasing pressure to prevent Britain from sliding into recession after a wide-ranging health check of the economy completed since the referendum showed the sharpest downturn in activity since the peak of the financial crisis seven years ago,

Service industries ranging from banks to restaurants, hedge funds, bars, gyms and hairdressers were all affected by what was described as as a “dramatic deterioration” in business confidence that suggests the economy is on course to shrink by 0.4% in the third quarter unless conditions improve.

The City now expects the Bank to deliver a package of immediate support – including a cut in interest rates and a resumption of its quantitative easing programme – when its monetary policy committee meets early next month.

Philip Hammond, the new chancellor, admitted that confidence had been dented by the surprise of Brexit vote and dropped a broad hint that he was contemplating spending increases and tax cuts for his autumn statement.

In the first major survey of business activity and confidence since the referendum on 23 June, the services sector was particularly hard hit, showing its biggest drop on record.

Manufacturing dropped to its lowest level since February 2013, according to Markit, which compiles the data in its purchasing managers’ index (PMI).

The composite index, which measures both services and manufacturing, fell from 52.4 in June to 47.7 - an 87-month low. Anything below 50 signals a contraction in activity.

The services index dropped from 52.3 in June to 47.4, an 88-month low, while manufacturing fell from 52.1 in June to 49.1.

Chris Williamson, the chief economist at Markit, said: “July saw a dramatic deterioration in the economy, with business activity slumping at the fastest rate since the height of the global financial crisis in early 2009.

“The downturn, whether manifesting itself in order-book cancellations, a lack of new orders or the postponement or halting of projects, was most commonly attributed in one way or another to Brexit.

“At this level, the survey is signalling a 0.4% contraction of the economy in the third quarter, though much, of course, depends on whether we see a further deterioration in August or if July represents a shock-induced nadir. Given the record slump in service sector business expectations, the suggestion is that there is further pain to come in the short term at least.

“With policymakers waiting to see hard data on the state of the economy before considering more stimulus, the slump in the PMI will provide a powerful argument for swift action.”

Hammond told Sky News the PMI report showed that the Brexit vote had damaged sentiment.

“It tells us that people’s confidence, businesses’ confidence has been dented. They’re not sure, they’re in a position of uncertainty now,” he said after meeting with Chinese policymakers in Beijing. “Our job is to restore as much certainty as we can, as quickly as we can.”

Sterling swiftly tumbled by 1% against the US dollar, or more than one cent, to $1.31 as investors bet on an August interest rate cut, which also helped the FTSE 100 gain ground after early losses.

Samuel Tombs, of Pantheon Economics said the PMI report was “woeful” and should prompt the Bank of England to cut interest rates, while Neil Wilson, of ETX Capital, described the data as “truly abysmal”.

Labour’s shadow chancellor John McDonnell, who said this week that £500bn of infrastructure investment was needed to combat the economic slowdown, said the chancellor’s comments meant “Britain is on hold until Philip Hammond makes up his mind.”

He added: “Our country can’t wait for months on end whilst the Chancellor dithers about what to do. We need action now.

“The chancellor needs to immediately reverse the planned cuts to public investment, bring forward shovel-ready projects across the country to help build an economy where no one is left behind.”

James Smith, an economist at ING Bank, said: “This [report] helps cement our view that the Bank of England will deliver additional stimulus when they release their August inflation report. We expect a 25 basis point rate cut and an initial £50-60bn round of quantitative easing (potentially with an additional amount to follow over coming months) to help offset some of the economic impact of heightened uncertainty.”

Zach Witton, the deputy chief economist at the manufacturers organisation EEF, said: “Manufacturing looks to be weathering the storm slightly better than the services sector, as manufacturers have seen somewhat of a boost in export orders following the depreciation in sterling. Yet the flip side is a spike in input costs as the weaker sterling is pushing up import prices.

“The very sharp pause in activity indicates that manufacturers have reacted to the shock of the referendum result by adopting a wait-and-see approach. A key question is how long this will be sustained, as a failure to restart activity will have implications for their appetite for investment and recruitment, and thus have an implication for the real economy.

“The uncertainty surrounding the outlook for manufacturing highlights that there is potential for the government to shore up confidence in the coming months.”

Conservative MP Michael Fabricant, a leading leave campaigner and a former economics spokesman for the party, said PMI was not necessarily a reflection of the state of the economy.

“One day’s PMI data does not the economy make. It is a reflection on the amount of orders being placed by purchasing managers and that will be a function of the company’s order book and management policy, which may be to conserve cash flow, but which is not necessarily a reflection of the economy, but simple caution because we are going through a period of change,” he said.

“I would have been surprised, therefore, if the PMI data had not dropped. If however, the Bank of England is correct and there has not been a sudden shock to the economy, then I would expect the PMI to rebound in a few months as purchasing managers have to hurriedly restock in order to fulfil orders.”