The overall market shrank 6.5%, from an average of 10.3 million copies in December 2009, to 9.7 million in December 2010, with the quality sector down 9%.
Guardian News & Media's Observer fell 14.1%, to 301,457 copies from 351,019 copies.
Quality market leader The Sunday Times also came off badly, losing 9.4% of its circulation over the 12 months, to drop from 1,113,195 copies to 1,008,163.
In mitigation, the News International-owned title stripped out all of the 14,337 bulk copies it counted in its December 2009 issue and hiked its cover price from £2 to £2.20.
The Observer did not distribute any bulk copies in December 2009 or last month, and left its cover price at £2.
The Independent on Sunday stepped up its bulk distribution from 42,489 in December 2009 to 52,713 in December 2010, without changing its £1.80 cover price.
Nevertheless, its circulation dropped over the 12 months by 3.2%, from 155,460 to 150,437.
The Sunday Telegraph cut its 12,041 bulk distribution in December 2009 to nothing, contributing to a 6.6% drop from 525,088 copies to 490,322 copies. Its cover price was unchanged at £1.90.
The Mail on Sunday's circulation held up the best, falling just 2.4% from 2,000,473 to 1,951,783. The Associated Newspapers title reduced its bulk distribution from 115,807copies to 108,792 copies.
The biggest-selling Sunday title remains the News of the World, bulk-free, but down 6.8% to 2,600,985 copies.
Rival red-top the Sunday Mirror is falling towards the million copy mark with a 5.9% drop to 1,047,363, while fellow Trinity Mirror title The People was down 8.6% to 486,669 copies.
Richard Desmond's papers were also hit, with the Sunday Express shedding 7.7% of its circulation to fall to 544,870, and the Daily Star Sunday down 4.6% to 336,868 copies.
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