Construction activity in the UK fell sharply in August as contractors continued to feel both the bite of the credit crunch and the downturn in the housing market, according to a key industry survey.

The CIPS/Construction Purchasing Managers' Index measured construction activity at 40.5 in August, a higher reading than July's 36.7 but firmly below the neutral mark of 50. Any reading below 50 indicates that the market is contracting.

Although construction activity dipped for the sixth month in a row, August's activity levels were slightly higher than the survey's all-time low reached in July, the Chartered Institute of Purchasing & Supply (CIPS) said.

Housing construction was again the worst hit arm of the construction sector, after showing a fall for the ninth consecutive month. Housebuilding activity in August was considerably lower than the annual and long-run averages for the sector.

In contrast, the civil engineering sector, which is involved in road building and railway upgrades, posted only a modest decline in business activity.

Roy Ayliffe, director of professional practice at CIPS, said: "Although the latest data suggest that the rate of contraction is easing, conditions remain relatively depressed overall.

"With far fewer new business opportunities to pitch for, purchasing managers said competition between firms intensified, which, in turn, lowered the values of tenders."

Regarding the beleaguered housebuilding sector, Mr Ayliffe said: "In an attempt to cope with the onslaught of rising prices, difficult trading conditions and narrowing confidence, purchasing managers were forced to further reduce levels of procurement activity, while more jobs were axed."

Business sentiment remained subdued as contractors predicted that the downturn could continue for some time.

Adding to the gloomy picture, input price inflation, although slower than in July, persisted at a high level. Increased raw material and fuel costs were blamed for the latest inflation.

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