MANUFACTURERS facing pressure from falling sales and rising raw material costs have been cutting jobs at the fastest rate for two years.

The squeeze on the workforce came as companies continued to report lacklustre levels of activity - though the performance was stronger than in the past four months.

The Chartered Institute of Purchasing and Supply (CIPS) said it found employment in the manufacturing sector fell at the sharpest rate since May 2003 as companies carried out another round of cost-cutting and redundancy programmes.

It said margins remained under pressure because companies could only pass on a fraction of the rise in energy and other raw material costs.

The purchasing managers index offered some encouragement. CIPS said its overall activity figure of 50.1 for last month was up from 49.5 in July and higher than City forecasts.

A figure above 50 represents expansion for the sector, which has fallen into recession after official data revealed two successive quarters of contraction.

CIPS said production also expanded at the fastest rate since March as companies increased output for the launch of new product lines, particularly consumer goods.

Economists said the figure for last month provided limited respite as high oil prices were expected to continue to act as a brake on activity.

There was a slight rise in factory gate prices for the first time in four months, passing on some of the rise in raw material costs.

Roy Ayliffe, CIPS director of professional practice, said: "General operating conditions remained challenging against a backdrop of soaring input price inflation, with costs driven primarily by high oil prices.

''Employment also took a blow, as manufacturers reported redundancies and other cost-cutting measures to the workforce."