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A quarterly survey of 5,000 businesses by the British Chambers of Commerce suggests confidence has collapsed in both manufacturing and service sectors.
The firms call for urgent action from the government and the Bank of England.
Technically the UK is not yet in recession - defined as two consecutive quarters of negative economic growth.
But the BCC described the survey results as "exceptionally bad" and said the economy was under "immense pressure" for the second quarter in a row.
It also said the jobless total was expected to increase within two years.
The BCC believes the number of people out of work will rise by between 300,000 and 350,000 over the next year or two, which would take the unemployment total to more than two million.
Confidence had collapsed in both the manufacturing and service industries, according to the survey.
The BCC represents small and medium sized companies, and argues that a recession has already begun.
It wants the Bank of England to do what it can to stimulate the economy, by cutting interest rates on Thursday.
Rate cut
BCC Director-General David Frost said: "We are clearly in a very difficult economic period but it is important that we retain a sense of proportion.
"Many parts of the business community continue to perform well. The government needs to say that business taxes will be cut.
"The Bank of England needs to cut interest rates immediately and politicians need to get behind our businesses in these challenging times."
BBC Business correspondent Nils Blythe says the idea of a rate cut is now supported by the majority of city economists, in spite of still rising inflation.
The survey comes the day after the FTSE 100, which was launched in 1984, fell 391.1 points, or 7.85%, to close at 4,589.2.
This meant that the UK's top share index chalked up its biggest ever one-day points fall, wiping Ј93.4bn off the value of the index's shares.
(BBC)
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