The quarterly SME Trends survey found that 23% of the 359 respondents reported output volumes had increased in the three months to July, while 28% said they had fallen.

The balance of -5% was the first fall since October 2009 when the different stood at -14%.

Alongside the deterioration in activity, optimism about the general business situation fell back following a sharp improvement in the previous quarter.

Lucy Armstrong, chair of the CBI’s SME council, said: "Challenging domestic conditions, continuing uncertainty over the Eurozone, and a broader loss of momentum in global growth are clearly taking their toll on the UK’s smaller manufacturers.

"Production has fallen over the last three months and sentiment has deteriorated, while growth in demand has stalled with little improvement expected in the coming quarter."

Meanwhile, figures published today by the Office of National Statistics show that production fell by 2.5% in June, compared to the previous month, while manufacturing contracted by 2.9%.

The  manufacturing index revealed the manufacturing sector shrank by 4.3% year-on-year.

The ONS cited the moving of the late May 2012 bank holiday to June and the additional bank holiday for the Queen’s Diamond Jubilee as contributory factors.