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Hopes of a beginning to the end of the economic gloom have been dashed in the latest IPA Bellwether report, which shows that the drop in spending during the first quarter of this year was the largest since the end of 2001.

The steepening downward trend comes after two periods in which the decline seemed to be bottoming out, sparking cautious optimism that the worst was over.

But the latest survey published this week suggests companies have slashed budgets in almost all areas of marketing activity, with above-the-line advertising the worst affected.

The severity of the recession is also reflected in the fact that UK adspend has now fallen for three consecutive years.

Not even direct marketing and sales promotion have benefited from cash-strapped clients' search for more accountable and flexible communication routes. The drop in sales promotion budgets was the steepest since the survey began three years ago.

Stephen Woodford, the IPA president, described the findings as "disappointing" and warned: "There's no doubt we are experiencing volatile times."

The survey, carried out on the IPA's behalf by NTC Research among more than 200 UK-based companies, cites disappointing sales and revenue growth and a weaker-than-expected improvement in business conditions since the end of the Gulf conflict as the reason for the slump.

This is borne out by findings that show that although average marketing budgets for 2003 were set higher than actual spend for 2002, they are already being slashed by clients as business confidence wavers.

"Marketing managers are treading cautiously," Chris Williamson, the report's author, said. "While previous reports had shown that budgets for 2003 had generally been set higher than 2002, the failure of sales and revenue growth to pick up sharply in the wake of the Iraq war has meant that this budgeted spend has already been adjusted down."

Internet promotion was the only activity to buck the trend. But the rise in spend was still less than in the previous two quarters.

Only 18 per cent of companies questioned reported an upward revision to their marketing budgets during the first quarter of this year with 29 per cent reporting a cut.

The Bellwether findings are in line with other downbeat verdicts. ZenithOptimedia predicts that UK adspend will decline by 2.6 per cent in real terms this year, while Advertising Association research shows a 1.5 per cent decline in real terms for the first quarter of 2003.

Woodford claimed there was comfort to be drawn from the fact that more than half of all clients were expecting to maintain their level of spend this quarter and that about 20 per cent were increasing budgets.

"This is against a background of higher budget setting for 2003 over 2002, so budgets are at a higher base level," he said.