Economists believe the Bank of England may be forced to cut interest rates further after new figures showed activity levels in the manufacturing sector eased in December.

According to the Chartered Institute of Purchasing and Supply, recent gains made by the sector were lost last month as firms struggled to come to terms with the ongoing effects of the credit crunch and higher costs.

The group's purchasing managers' index fell to 52.9 last month, below the 53.6 which analysts had been expecting and down from the 54.3 which was recorded in November. A reading above 50 on the index represents growth.

There was also a slump in the number of new orders, with the figures falling to a 21-month low in December, reflecting weaker domestic and foreign demand.

Some experts believe that the weaker activity means a further slowdown in the manufacturing sector is likely, which will force policymakers at the Bank to cut interest rates sooner rather than later.

Howard Archer, chief UK economist at Global Insight, said a quarter-point reduction to 5.25% could come as early as next week, when the members of the Bank's Monetary Policy Committee meet to discuss rates.

He said: "The December manufacturing purchasing managers' survey indicates that the recently resilient manufacturing sector is now starting to flag in the face of serious headwinds.

"Going forward, we expect the manufacturing sector to lose further momentum as it is buffeted by the credit crunch, slowing domestic demand and elevated oil prices."

Mr Archer added: "The weaker manufacturing survey keeps open the possibility that the Bank of England could cut interest rates by a further 25 basis points to 5.25% as early as next week."

And Paul Dales from Capital Economics said: "The fact that price pressures appear to be easing as activity slows will allow the MPC to respond to the weaker economic climate by cutting rates further in the coming months."

The Cips manufacturing index remained above the 50 mark separating growth from contraction for the 29th successive month.

And while it rose during November compared to October, that was described by Mr Dales as "probably a blip in the downward trend".

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