Credit insurer Euler Trade Indemnity has reported a steep rise in the number of claims for bad debts and business failures, raising fears of a UK recession .

Policyholders made 888 claims for the first quarter of 2001, the highest since the first quarter of 1999. Euler's quarterly financial trends survey found the fall in company profits had accelerated, despite a recent decline in interest rates.

Running parallel to this decline in profits was a sharp rise in payment delays. The survey reported customer payments were on average 25 days late, often attributed to cashflow problems.

Companies were discounting list prices faster than at any stage since 1993, while costs had been rising steadily over the past 18 months to two years. Business activity recorded its first fall since 1998's fourth quarter. Total order books recorded their lowest figure since 1992.

Euler's chief economist William Simpson said: "Company profits have dipped in the first quarter in services, manufacturing and distribution. Culprits appear to be the duration of higher energy and labour costs, as well as a record amount of price discounting."

However, orders had fallen, while the number of cancelled orders rose. Interest rates were actually aiding profits, "suggesting some-thing more serious is going on".