The UK's recovery was dealt a blow after research showed fears about a possible war and weak stock markets were continuing to depress the economy.

According to a report for accountants BDO Stoy Hayward, the UK economy is stuck in second gear.

Order books are continuing to slow and the survey warned overall growth would be insufficient to prevent unemployment rising by next summer.

The gloom was blamed on a range of concerns, from weak equities and possible oil price hikes to the threat of war and further acts of terrorism.

With both the manufacturing and service sectors suffering, BDO said it was now looking for further reduction in the cost of borrowing.

Partner Peter Hemington said: "We believe a 0.25 per cent interest rate cut would make sense. The drab outlook facing both sectors at the same time is new and worrying."

Douglas McWilliams, chief executive of the Centre of Economics and Business Research, which compiled the report for BDO, said: "An interest rate cut by the end of this year will buoy the ailing UK economy."

The report's optimism index - an indicator of GDP growth two quarters ahead - fell from 98.1 in July to 98.0 in October, its lowest reading for a year.

BDO said the fall suggested economic growth of just 1.3 per cent in the second quarter of next year, casting doubt over the Chancellor's targets.

BDO added: "Business confidence levels are gradually falling and, while strong enough to prevent a lurch into recession, are insufficient to fire up a strong recovery."

The output index, which correlates with GDP one quarter ahead, dipped to 99.7 in October from July 99.8.

BDO said strong demand from the public sector, fuelled by the Government's spending plans, was being offset by weaker conditions in the private sector and overseas.

The indices are calculated by taking a weighted average of results of the UK's main business surveys carried out during the last three months.