Economic growth is at its slowest for three years, according to new figures.

A housebuilding slump saw the economy expand by just 0.2 per cent between April and June - the slowest pace since the first three months of 2005.

The annual rate of growth in gross domestic product also slowed to 1.6 per cent - again the lowest for three years.

Construction output fell by 0.7 per cent due to a "particularly large" fall in new housebuilding, according to estimates by the Office for National Statistics.

UK housebuilders have shelved new projects since March as would-be buyers struggle to get mortgages because lenders hit by the credit squeeze have hiked borrowing costs.

In recent weeks, builders have axed around 5,000 jobs as the market heads downwards.

The quarterly growth performance would have been worse if not for a slight recovery in output from the services sector, which accounts for around 74 per cent of the economy.

Services output grew by 0.4 per cent in the second quarter of 2008 - compared to 0.3 per cent in the first three months of the year - driven by progress from transport, communications and storage firms.

This offset output growth of just 0.1 per cent from business services and finance firms - the slowest pace in more than six years.

The estimates also revealed a 0.4 per cent decline in manufacturing output over the quarter.

The squeeze on consumers was highlighted by weaker growth in retail output, which slowed to 0.2 per cent during the second quarter.