The March data showed that the economy was in trouble even before the US launched the current war in Iraq, some observers said.
The current jobs data also showed the biggest one-week spike in the number of Americans claiming on unemployment insurance in a year.
Despite the numbers, the Federal Reserve remains confident that the uncertainty dogging both the economy and the markets will fade once the hostilities are over.
But many economists believe that since the problems of over-supply, under-investment, slumping consumer confidence and the persistent after-effects of the 1990s bubble predate the war, any post-war boost will prove strictly temporary.
"There's underlying weakness in this data," said Drew Matus, economist at Lehman Brothers in New York. "Things just aren't getting better."
The ISM survey's index of non-manufacturing activity fell to 47.9 in March from 53.9 the month before, making March the worst reading since October 2001, just after the September 11 attacks on the US.
It was also the first time since January last year that it strayed below 50, the cut-off point between expansion and contraction.
Jobless claims, meanwhile, showed a leap of 38,000 people to 445,000 in the week to March 29, the highest figure since April 2002.
GLOBAL GROWTH UNDER PRESSURE FROM WAR
The World Bank expects a slight improvement in economic growth this year but says this could be hampered if the war in Iraq drags on.
The Bank's Global Development Finance 2003 report said the global economy would grow by 2.3% this year compared with growth of 1.7% last year.
But it warned that the war in Iraq is affecting economic recovery with its impact on the price of oil and the uncertainty among investors and businesses regarding the length of the conflict.
The Bank — which has the brief of aiding and investing in developing nations — says its forecasts are based on the war in Iraq lasting just a few months.
It admits projections could change if the war were to last longer.
However, if the war ends relatively quickly, the Bank sees a hesitant recovery in richer nations like the United States this year.
The International Monetary Fund, which released excerpts from its World Economic Outlook at the same time, is a little more optimistic.
The chance of a US recession — a dangerous prospect for the entire world economy — have dropped to just 15%, it said.
But it sounded a note of caution about the rapid rise in housing prices in Europe and the US — but particularly in the UK.
Stripping out inflation, UK house prices are up 70% from the last trough, while the Netherlands, Ireland and the US were all in the danger zone as well.
"The impact of housing price busts, when they do occur, is much more significant on the real economy, probably double the average impact of an equity price bust," said IMF global economist Jonathan Ostry.
EU ACTS ON FRENCH DEFICIT
The European Commission is to start disciplinary steps against France for breaching its strict limits on budget deficits.
Under the EU's Growth and Stability Pact member countries must keep their budget deficit's below 3% of national economic output.
France, the eurozone's second biggest economy, had a public deficit of 3.1% in 2002 and the Commission's provisional forecasts see it rising to 3.7% this year and 3.6% in 2004.
The Commission said France has not yet taken adequate measures to reduce its public deficit.
It said tax cuts and overruns in government spending were major contributors to the budget slippage in 2002.
The Stability Pact is designed to ensure national budgets do not endanger monetary union.
Any member that exceeds the 3% limit has two years in which to bring its deficit down, or it will face stiff fines from the Commission.
CABINET ROW MARS JAPANESE REFORM
A row has broken out between Japan's two top financial officials after one accused the other of lying.
Finance Minister Masajuro Shiokawa said Economics Minister Heizo Takenaka had lied when he said he had the support of Japan's prime minister for key tax reforms.
The row is set to complicate matters for the Prime Minister, Junichiro Koizumi, who has been criticised for failing to push through economic reforms.
The Finance Ministry is unhappy with the changes, and when Mr Shiokawa was asked about Mr Takenaka's comments he said they were "an outright lie".
"What Mr Takenaka said is wrong," Mr Shiokawa said.
The two men represent very different strands in Japan's politics. Mr Shiokawa is an 81-year-old veteran of the Liberal Democratic Party, a close-knit collecting of warring factions which has ruled Japan for all but a couple of years over the past half-century.
IMF GRANTS LOAN TO BOLIVIA
The International Monetary Fund (IMF) has lent Bolivia $118m (£75m) and backed off austerity demands which provoked violent anti-government protests.
The money will be welcomed by the government of centre-right president Gonzalo Sanchez de Lozada, which is reportedly on the verge of collapse.
Mr Sanchez de Lozada does not control Bolivia's congress — a fifth of which is made up of a left-wing indigenous party which blocks his every move — and the economy is into its fifth year of recession.
The IMF money comes after Mr Sanchez de Lozada — who has the lowest opinion poll rating of any South American leader — asked for and received a $10m loan from the US last week.
The president has close ties with the US, which promised him $150m for a drug eradication programme when he was elected.
JAPAN'S ECONOMY IN MORE TROUBLE
The Bank of Japan's quarterly survey of business sentiment shows the economy has flattened out as export growth slips.
The Tankan index fell to minus 10 in March, from minus 9 in December, the first downturn since December 2001.
"The survey overall showed the economy was levelling off," said Toshio Sumitani, economist at Tokai Tokyo Research Centre.
"What is alarming is that an improvement among large manufacturers, who had led the recent recovery of business confidence, has come to a halt," he added.
The US-led war on Iraq had little impact on expectations, though about 90% of the survey was conducted before the start of hostilities.
JAPANESE BUILDER BEGS FOR BAIL-OUT
Debt-laden Japanese construction firm Kumagai Gumi has asked for 300bn yen (£1.6bn; $2.5bn) in emergency financing, and may be forced into a merger with rival builder Tobishima.
The call for aid comes on top of another 300bn yen the firm has already reported in restructuring costs, and 450bn yen under a previous bail-out package in 2001.
Overall, Kumagai Gumi may become the most expensive Japanese bail-out case ever, underlining the catastrophic financial situation of the recession-hit construction sector.
US $80BN WAR CHEST 'FOR ALLIES ONLY'
The US House of Representatives has approved almost $80bn (£51bn) in financing for the war in Iraq and the start of reconstruction.
But in a controversial amendment, congressmen insisted that none of the money for rebuilding should go to companies from France,
Germany, Russia or Syria — countries seen as implacable opponents of the US pursuit of the war.
The White House had lobbied against the amendment, but the bill was nonetheless passed by an overwhelming 414-12 majority.
CONGRESS APPROVES AIRLINE AID
The US Congress has approved at least $3.2bn (£2bn) in aid for struggling airlines, despite objections from the White House that the sector was being bailed out too readily.
The aid package is in response to complaints from airlines that the Iraqi war was causing an unprecedented collapse in ticket sales, at a time when major carriers were already weak.
Two separate proposals made their way through the legislature a $3.2bn plan in the House of Representatives and a $3.5bn package in the Senate.
GOLD PLUNGES TO LOWEST
Gold prices dropped to their lowest in nearly four months in Europe as US troops continued towards Baghdad.
Gold has lost some $15 as the dollar and equities have risen on the US-led advance, which has raised the prospect of an early end to the conflict.
Gold crept back up towards the end of the European session, to end at $325.55/326.25 an ounce, having moved away from a near four-month low of $323.50. That was still well down on New York's close at $329.70/330.20.
OIL FIRMS FINED FOR PRICE FIXING
The world's four largest oil firms have been fined for fixing the price of petrol in France.
The French subsidiaries of BP, Shell, ExxonMobil and TotalFinaElf were fined a total of 27m euros ($30m; £19m) by France's competition authority for price colluding at service stations.
The regulator said the firms "frequently and repeatedly" exchanged data to set petrol prices at the pump by telephoning each other several times a week in 1999 and 2000.
WORLD BANK AID FOR SRI LANKA
The World Bank has promised Sri Lanka grants and interest-free loans worth about $800m.
The money, which will be provided by the World Bank's International Development Association (IDA) is intended to assist the government in rebuilding the country.
It is significantly higher than previous IDA lending to Sri Lanka.
The World Bank's director for Sri Lanka, Peter Harrold, said that this was also an opportunity for the government to bring about rapid economic growth.
LLOYD'S BACK IN THE BLACK
Lloyd's of London, the world's oldest and largest insurance market, has returned to profit for the first time in six years.
The 315-year old insurer, used by the majority of the UK's blue-chip companies, said its results indicated better times ahead.
It reported profits of £834m ($1.3bn) for 2002, against a loss of £3.1bn in 2001.
MURDOCH PULLS OFF ITALIAN JOB
The European Union has given Rupert Murdoch's News Corp the go-ahead to become a "quasi monopoly" operator in Italy's pay-TV market.
MARKETS SURGE AFTER MILITARY ADVANCE
Stock markets in the US and Europe have risen sharply after coalition troop advances towards Baghdad raised hopes of a swift end to the conflict.
In New York, the Dow Jones index rose sharply as soon as the Wall Street markets opened and ended the day 215 points or 2.7% — higher at 8,285.
The Nasdaq technology index also performed strongly, rising by almost 4% during the day.
The strong gains were also reflected in Europe where London's FTSE 100 index of leading shares closed 67 points — or 1.9% higher at 5,353.
Germany's DAX leapt 5.7% higher while in Paris the CAC 40 closed with gains of 4%.
BRAZIL RAISES MINIMUM WAGE
Brazil's centre-left government has offered workers an inflation-busting 20% rise in the minimum wage last week.
President Luiz Inacio Lula da Silva and his Workers' Party (PT) promised during last October's elections to double the minimum wage within four years.
The monthly minimum wage has been increased by more than the 15.9% inflation recorded for the 12 months to February to 240 reals (£45; $71).
But the increase will cause further inflationary pressures.
UK HOUSE PRICES KEEP ON BOOMING
UK house prices were up 26.2% year on year in March, the Nationwide building society has calculated, contradicting other reports that the market was stagnating.
During the month, property prices jumped by 1.9%, more than many analysts had expected.
Other recent surveys, notably by the Halifax bank, another large mortgage lender, had pointed to a relatively abrupt slowdown.
SCANT RELIEF FOR JOBLESS GERMANS
Germany's jobless rate has dipped below the four-year high recorded in February, but economists warned there were no imminent signs of a sustained recovery.
The seasonally unadjusted unemployment rate dropped to 11.1% in March, down from 11.3% the previous month.
But with more than 4.6 million people still out of work, the government remains under severe pressure to create jobs — a key promise in last September's election campaign.
SHOCK FALL IN RETAIL SALES
UK retail sales have put in their worst performance in more than a decade, according to new figures from the CBI.
Retailers reported sales falling at their fastest rate since July 1992, the CBI's monthly survey found.
The bosses group blamed worries about the war, impending tax rises and concerns about the housing market.
Sales were weak in all areas except hardware, china and DIY.
The figures are likely to alarm the Bank of England, which in February cut interest rates to a 48-year low of 3.75%.