Britain's economy has sunk into recession for the second time in three years after a dramatic slump across the financial services and construction sectors and a poor start to the year on the high street.

Official figures showed the economy contracted in the first three months of the year after a poor performance before Christmas. This meant it registered two consecutive quarters of negative growth, the standard definition of a recession. The economy is now in its longest depression for 100 years, with little sign of regaining its previous record output before 2014.

A silver lining was provided by a CBI survey of the manufacturing sector that pointed to a recovery in sales and confidence, albeit from one of its worst slumps on record in January. And a survey by the British Retail Consortium found an increasing willingness by shop owners to hire workers. More than 3,000 jobs were created, mainly by large supermarkets opening new stores.

But HSBC, Britain's largest bank, offset this news when it announced plans to shed 2,000 staff in its UK retail division over the next year as part of a worldwide redundancy programme. Banks have cut thousands of jobs in the past few years to reduce costs and cope with a sharp slowdown in business caused by the financial crisis and subsequent drop in lending.

The business and financial services sector fell by 0.1% in the first three months of the year. The once all-powerful financial services sector, which accounts for a whopping 29% of GDP, "made the largest negative contribution", according to the Office for National Statistics.

The CBI said it was concerned that poor GDP figures would persuade other employers that a recent improvement in sentiment across several sectors was misplaced, leading them to reverse plans to add jobs and increase investment. Forecasters have pencilled in growth of around 0.8% this year followed by a jump to 2% next year. But several economists argue that, without a rethink of its austerity measures by the Treasury and limited plans for investment, growth could evaporate next year as quickly as it did over the past two years.

After a series of small ups and downs, output has flatlined since September 2010, according to the ONS, shortly after the coalition government took office. Its latest survey of output showed a contraction of 0.2% in the first quarter after a 0.3% decline in the last three months of 2011.

Several European countries have been hit by double-dip recessions following turmoil in the eurozone and the fallout from the Greek crisis. Italy, Spain, France and the Netherlands have all seen growth turn negative in the past six months. Spain, in particular, is expected to remain in difficulty throughout the year as it wrestles with soaring unemployment, rising debt levels and a fall in consumer spending after wage and benefit cuts.

Concern over Spain's future and the possibility it will need a multibillion-euro bailout from Brussels and the International Monetary Fund has weighed heavily on global growth. While the situation in the UK is less acute, the government could face a similar squeeze towards the end of the year once welfare benefit cuts, limits on tax credit payments and persistently high inflation have taken their toll.

Pay rises have lagged behind inflation for more than two years, cutting disposable incomes and hurting high street spending, with a knock-on effect for the Treasury in lower tax receipts. But the US economy has grown strongly. Ben Bernanke, the central bank chief, said on Wednesday that the outlook remained on course for moderate growth, although he cited Europe as a reason to be cautious. The US economy is expected to have grown 2.5% in the first quarter when estimates are published on Friday. The ONS said that Britain's service industries, which make up more than three-quarters of the economy, grew by just 0.1% in the first quarter, after declining by 0.1% in the fourth quarter of last year. Industrial output was 0.4% lower, while construction shrank by 3% – the biggest drop since the start of 2009.

Like the US Fed, the Bank of England has refrained from pumping more money into the economy under its quantitative easing programme, which currently stands at £325bn.

"The biggest surprise – and perhaps the most worrying element of this report – was the disappointment in services output," said Alan Clarke at Scotia bank. "Ironically, construction, which had the most potential to determine whether or not the UK is in recession, proved much less negative than feared. The Bank [of England] recently highlighted that it cares most about underlying growth. Our gauge of underlying GDP showed zero growth – still very disappointing."

The GDP figures conflict with other recent surveys, which have painted a steadily improving economic picture.Economists also question the reliability of the construction numbers. Joe Grice, the statistics office's chief economist, said the bigger picture is that the UK economy, in volume terms, was flat between January and March compared with the same period last year. Looking at the UK since last summer, he added that the picture is of "a flattish economy". Britain is the first major economy to report GDP data for the first quarter of 2012.