Analysts warn that Britain will soon be "flirting" with recession
A flash estimate from the closely-watched Markit purchasing managers' index (PMI) for July pointed to the worst performance for more than seven years - when the British economy was in the depths of a recession.
The pound, already trading at 31-year lows against the US dollar, fell by a cent on the figures.
The figures will add to pressure on the Bank of England to cut interest rates next month to cushion the economy from the Brexit blow.
They come as new Chancellor Philip Hammond indicated the UK could "reset fiscal policy" as data emerges about how the economy has reacted to the vote - indicating a less aggressive approach to cuts aimed at shrinking the deficit than that taken by former chancellor George Osborne.
Markit chief economist Chris Williamson said: "July saw a dramatic deterioration in the economy, with business activity slumping at the fastest rate since the height of the global financial crisis in early 2009."
He said the downturn - seen in order cancellations, a lack of new orders and the postponement or halting of projects - was "most commonly attributed in one way or another to Brexit".
The survey gave a reading of 47.7 for business activity across the economy - where the 50 figure separates growth from contraction. It was down from 52.4 in June.
Both the manufacturing and services sectors shrank, according to the figures, which were worse than expected.
A slump in services is particularly significant as the sprawling sector - which ranges from law firms and accountancy to bars and restaurants - represents about four-fifths of economic output and has led the economic recovery in recent years.
The sector also saw a record slump in expectations. Mr Williamson said it suggested there was "more pain to come in the short term at least".
He added: "At this level, the survey is signalling a 0.4% contraction of the economy in the third quarter, though much of course depends on whether we see a further deterioration in August or if July represents a shock-induced nadir."
Mr Williamson said the figures provided "a powerful argument for swift action" from the Bank of England as it weighs up whether to cut interest rates next month.
Investec economist Chris Hare said: "Our view remains that post-Brexit uncertainty will see the UK flirting heavily with a recession."