Britons' confidence in the economy and their finances has suffered its biggest drop in close to 20 years, raising fears that the Government's austerity onslaught will set off a self-feeding downward spiral.
The most closely-watched barometer of consumer confidence revealed an "astonishing collapse" in January as the VAT rise took effect, according to market research group GfK NOP.
The first taste of the fiscal tightening to have a widespread impact on consumers appeared to have hit sentiment hard, researchers said, even before the full impact of the public spending cuts is felt.
"In the 35 years since the index began, confidence has only slumped this much on six occasions, the last being in the midst of the 1992 recession," said Nick Moon, managing director at GfK NOP Social Research. "Today's figures, when combined with the bleak economic forecast, will make talk of a double-dip recession unavoidable."
The eight-point plunge in optimism took the barometer's headline reading to -29, the lowest since March 2009, when the UK was mired deep in the last recession.
Their findings will prompt more questions as to whether the Coalition risks tipping the economy back into recession through its programme of tax rises and spending cuts to reduce the budget deficit.
People are becoming increasingly negative about their own finances and the wider economy, both in retrospect and looking forwards, the survey showed.
If consumers have no confidence that their jobs are safe and that Britain will keep growing, the risk is that they will rein in their spending, denting domestic demand.
Rising inflation is also putting spending under pressure, as wages are not keeping pace with the increases.
The survey of 2,000 people, conducted on behalf of the European Commission, took place earlier this month, before official figures revealed the economy shrank in the final quarter of 2010 – which is likely to increase consumer nerves.
People were keener to save, likely to reflect increased expectations that the Bank of England will be forced to raise the interest rate because of high inflation, as well as the wish to create a safety net if harder times arrive.
The biggest fall in confidence was seen in enthusiasm for making major purchases, which was taken to reflect the rise in the VAT to 20pc at the start of this month.
Separately, a survey from the Confederation of British Industry reported that sales growth on the high street slowed this month, as expected, after spiking ahead of the VAT increase.
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