GDP probably grew by just 0.4 per cent in the last three months of 2010, lower than many economists have forecast and barely half the 0.7 per cent recorded in the third quarter of the year, survey compilers Markit said.
The Markit/CIPS services purchasing managers' index dropped to 49.7 in December, in contrast to economists' forecasts that it would hold steady at November's reading of 53.0.
Readings below 50 indicate contraction. Thursday's data follows a similarly weak construction PMI, and comes in sharp contrast to the equivalent manufacturing index which showed the strongest activity growth in 16 years.
"A very disappointing end to the year in the service sector matches a similar deterioration in the construction sector," said Markit chief economist Chris Williamson. "UK economic growth is completely reliant upon export sales while domestic demand has wilted."
December was the first time the services PMI fell below 50 in 20 months. The survey covers businesses making up about 40 percent of the economy, but does not include retailers or the public sector.
Markit said anecdotal evidence suggested that December's unusually snowy weather was the main factor behind the fall in the index. Another problem was the biggest fall in new business since April 2009, with public sector demand especially poor.
"This continued to impact adversely on service sector business confidence which remained well below its trend level," Markit said.
Major public spending cuts planned for this year are weighing on the prospects of many private-sector service companies, while manufacturers are finally benefiting from the sharp fall in sterling in 2008 as the global economy recovers.
"Further weak economic growth should be expected in early 2011, and the drop in services activity, alongside the decline in construction, is a warning that manufacturing alone is unable to sustain the economic recovery," Williamson said.
Service sector employment contracted for a third consecutive month.
One problem both manufacturers and service companies share is rising input costs. Thursday's survey showed a rise in the services input price index to 60.5 from 57.1, its highest level since September 2008. Manufacturing input prices rose in December at the fastest pace since the survey began in 1992.
Hotels and restaurants were the service sector suffering most from the rising cost of food and fuel, and also one of the worst affected by poor weather, alongside 'personal services'.
However, the prices charged by businesses grew only slowly, which is likely to reassure the Bank of England that the dangers are limited for consumer price inflation, which is already more than a percentage point above target at 3.3 per cent.