LONDON (Bloomberg) - UK banks forecast that credit market turmoil will last at least until the end of the year, twice as long as they predicted three months ago, according to a survey by the Confederation of British Industry (CBI).

Lending conditions will worsen in the next six months, leaving banks with "significantly" higher borrowing costs, according to the quarterly survey of financial firms.

"This is a very serious crisis in the financial sector," Ian McCafferty, chief economic adviser at the confederation, told reporters March 28. "There's going to be quite some considerable time before we see improvement in the situation."

The crunch, triggered by rising defaults on US sub-prime mortgages, has spread into most of the world's credit markets and increased borrowing costs, threatening to deter business investment and consumer spending. The Bank of England has cut its benchmark interest rate twice since December to spur growth.

The rising cost of capital will herald a "prolonged period of slower growth," Mr. McCafferty said. Forty percent of companies surveyed said their difficulties in raising money will hold back development, up from 24 percent in the previous quarter.

Banks also are apprehensive about rising bad debts this year, Andrew Gray, a PricewaterhouseCoopers LLP partner, said in a presentation of the report in London. "Pessimism remains, and it is still significant," he said.

Financial firms plan to reduce total spending, excluding marketing, to the lowest level in more than 15 years to offset higher funding costs, the survey said. They are also reluctant to invest in new products and campaigns to win customers.

Financial services account for about four percent of the UK's total employment. The industry shed about 9,000 jobs in the final quarter of 2007 and will cut as many as 11,000 in the next three months, the CBI said. The survey showed the outlook for employment was the most negative since December 2002.

US banks hit by mortgage losses and writedowns also are cutting staff, eliminating more than 34,000 jobs in the past nine months, the most since the dot-com boom fizzled in 2001. Citigroup Inc., Lehman Brothers Holdings Inc. and Morgan Stanley are among firms to disclose job cuts.

Britain's economy expanded more slowly than forecast in the fourth quarter as consumer-spending growth was revised down, a report by the Office for National Statistics showed on March 28. Consumer spending rose 0.1 percent in the quarter, half as much as previously estimated, the statistics office said.

Bank of England Governor Mervyn King said last week he sees "a sharp slowing in growth coming" as financial-industry turmoil limits expansion in Europe's second largest economy. Financial services contribute between five percent and 12 percent of the UK's GDP, according to the confederation's Mr. McCafferty.

"So far the impact from this inter-bank crisis has been contained," he said. "But we don't think the wider economy will get away scot-free from this."

The CBI and PwC surveyed 79 financial-services firms including banks, building societies, insurers, brokers and fund managers between February 20 and March 5, just before the bailout of Bear Stearns Cos.