Britain saw foreign investment halve last year in a dramatic plunge that experts say highlights the country's over-dependence on financial services.

As David Cameron tries to make British diplomats work harder to secure foreign trade deals, figures from the United Nations suggest Britain's standing on the world investment stage fell sharply last year.

In its annual world investment report, the UN Conference on Trade and Development (Unctad) said foreign direct investment (FDI) into and out of Britain plummeted below global averages in 2009, largely owing to merger and acquisition activity drying up in the credit crunch.

The UK fell from fourth to fifth place globally as a recipient of FDI inflows last year – with investment down to $46bn (£30m) from $91bn in 2008. The 49% drop compared with a global fall of 37%.

Outflows from Britain fell even more dramatically, from $161bn to $18bn. That meant Britain slid from being the world's third-largest source of FDI in 2008 to the 14th-largest last year.

But Unctad noted the dive was likely to be a recession-related blip rather than the start of a new pattern for UK investment flows. Its investment expert Hafiz Mirza said much of the decline was in the services sectors, mostly financial services, and that manufacturing flows were largely unchanged – reflecting the government's drive to diversify the UK economy.

"It is mostly to do with M&A [mergers and acquisitions] declining so dramatically," said Mirza, noting a similar pattern in the United States, where FDI inflows fell 60% to $130bn. "M&A was down because no one wanted to acquire anyone and the UK is one of the main sources of M&A activity, both for UK firms and foreign firms based here."

"But the UK remains a central place for doing business. This is a blip and it's indicative of the UK's central role. The message is perhaps to diversify a bit beyond so much focus on M&A."

UK Trade & Investment (UKTI), the government's trade arm, noted that in terms of FDI stock, the value of all assets held in the country by foreign investors, Britain actually enjoyed a 14% annual rise in 2009. Its own figures last week showed inward investment generated 94,000 jobs in the latest financial year, an annual rise of 20%.

UKTI's chief executive, Sir Andrew Cahn, said the UK was still attracting "healthy levels of investment" and that the government was working to attract more overseas companies by cutting red tape and corporation tax.

"The UK is one of the most attractive destinations for inward investment with the largest industries in Europe for financial services, creative industries, life sciences and information and communications technologies," he said.

"But competition for investment is intense and we must fight hard to maintain our share. That is why the UK government has put attracting and retaining investment at the heart of its economic recovery plans."

Mirza said one way to reverse the decline in outflows would be to put more resources into greenfield investment activity – where a company launches a venture overseas by building new facilities from scratch. Such greenfield activity was "fairly stable" in the US last year, meaning its outflows suffered a much smaller 25% drop to $248bn.

Overall, Unctad calculated that FDI inflows worldwide fell by 37% to $1.11tn last year. Outgoing FDI dropped 43%, to $1.01tn.

However it said the effect of the financial crisis on foreign investment appeared to "bottom out" in the second half of the year. Its preliminary estimates are for global FDI inflows to climb to $1.2tn this year, rise further to $1.3-1.5tn in 2011 and possibly climb as high as $2tn in 2012. "However, these FDI prospects are fraught with risks and uncertainties, including the fragility of the global economic recovery," the investment report said.

It saw support increasingly coming from transnational corporations investing in low-carbon technology. Unctad estimates that in 2009 low-carbon FDI into renewables, recycling and low-carbon technology manufacturing alone amounted to $90bn.

Unctad also noted growing investment into developing countries and trade relationships between developing countries. But the body is keen to ensure that any such trend develops against the backdrop of clear frameworks that mean both sides benefit. Charities have repeatedly voiced concerns that investment in Africa in particular has been largely speculative and done little to help local people. Unctad said it was working to ensure African governments did more to set guidelines to ensure trade relationships did not simply repeat the old low-value-added model of commodity exports.

Referring to similar challenges in Asia, Mirza said: "If the government does not give a direction your local warlord will. Someone will play that role of market marker or intermediary. That's something that governments need to do, they need to play that role."