The Markit/Chartered Institute of Purchasing and Supply's construction index dropped to 49.1 from 51.8 in November, almost three times the drop analysts had expected. Readings below 50 indicate contraction.

The survey compilers said poor weather had contributed to the decline.

Only commercial construction activity managed to expand, and even here the rate of growth was the slowest in almost a year. House-building saw its sharpest contraction since April 2009 and civil engineering activity also declined.

"Even allowing for the hit to activity coming from December's severe weather, it is very clear that the economy cannot rely on a major contribution from construction going forward," said Howard Archer at IHS Global Insight.

Sterling weakened slightly after the data as investors bet that the sector's strong contribution to GDP growth in the second and third quarters of 2010 was unlikely to be repeated.

Although construction accounts for only around 6 percent of Britain's economy, the PMI index has proved a good leading indicator for GDP growth.

Economists are already penciling in a marked economic slowdown this year as the rise in VAT tax sales and hefty public spending cuts start to bite.

In a newspaper interview just before Christmas, Paul Fisher, the Bank of England's executive director for markets, warned that another quarter of negative growth in 2011 was not impossible. Britain's economy expanded by a surprisingly strong 1.2 percent in the second quarter of last year and 0.6 percent in the third, but analysts are expecting a slowdown to 0.5 percent in the fourth quarter and just 0.3 percent in each of the first two quarters of 2011.

"The outlook for the construction sector appears rather gloomy," said Simon Hayes, UK economist at Barclays Capital. "Cuts in government investment mean the civil engineering sector is likely to contract further and the residential housing market remains torpid."

The forward-looking elements of the survey provided little cheer. New orders growth picked up marginally in December, but remained below its long-run average and employment in the sector fell sharply.

"Anecdotal evidence suggested that staffing requirements continued to be assessed due to slow new order growth, with some companies indicating further redundancies," Markit said.