Mounting fears over the state of the economy have prompted the CBI to warn against large rises in the minimum wage.

Warning that "vulnerable companies" could be hard hit by extra costs, CBI chief Digby Jones has warned against union demands for an increase from £4.20 to £5.00 an hour.

His warning came as a survey found employees to be gloomy about the economic outlook.

A study by human resources consultancy Chiumento found that a third of workers believe the UK is heading for recession while 40 per cent expect unemployment to rise.

Adding to the uncertainty, a top building society boss has warned that Britain's booming house market is heading towards meltdown.

Abbey National's chief Luqman Arnold said he believed house prices were now "due for correction".

"In Britain, things are looking a bit toppy - we look set for a correction. Without inflation pushing up prices, consumers will view what they can afford in a different way," he said.

Arnold pointed to wider economic uncertainty and warned America's economy is still unsteady.

"Just look at what is happening in the United States - the consumer is holding up the economy by borrowing more to take advantage of rock-bottom interest rates," he said.

"If house prices fall, and wages are static, people feel less able to bear as much debt."

Meanwhile, publishing the CBI's submission to the Low Pay Commission, the bosses' organisation warned against forcing employers to raise wages.

With the Low Pay Commission due in February to recommend a new rate for the government to introduce from October 2003, the CBI said it would like to see only a "modest" rise.

"The fact is that firms most affected are those that are least able to absorb an increase in employment costs," said director general Digby Jones.

He warned that "pushing up the rate by more than average earnings would clearly cause considerable pain, and have an inflationary effect creating unintended consequences"

The CBI pointed to a survey showing that of firms most affected by the minimum wage, 21 per cent said they would cut jobs if the rate rose to £4.70 an hour, 36 per cent would sack workers at a rate of £5 an hour and almost half, 48 per cent, would cut jobs if a rate of £5.30 an hour was introduced.

"We cannot keep heaping costs onto vulnerable companies and expect them to take it on the chin. If we are not prudent, the result will be wide-scale job losses and that would be a disaster for the low paid," said Jones.