Confidence among small businesses has declined sharply in recent months, according to the Irish Small and Medium Enterprises Association (ISME).

The lobby group's latest business trends survey finds that almost half of small businesses in the Republic are less optimistic about business prospects now than they were a year ago.

ISME has attributed the trend to an increase in production costs, primarily due to spiralling insurance charges, and a general concern about the public finances. The group's chief executive, Mr Mark Fielding, has called on the Government to concentrate on "fiscal policy rather than book-keeping".

The ISME survey, which was conducted among 415 companies employing between one and 100 workers, finds that one-third of small companies employ fewer people now than they did at this time last year. Almost one-fifth of respondents said they expected to cut staff in the coming 12 months.

The results also show that sales and order books are running below normal levels in 45 per cent of small companies.

"These figures are no surprise to ISME," said Mr Fielding, who has recorded an increase in the volume of member queries on issues such as down-sizing and redundancy over the past few months.

Mr Colin Hunt, chief economist with Goodbody Stockbrokers, said that "alarmist talk" about the economy over the past couple of weeks had probably affected business confidence.

"A nose-dive in confidence has been a feature globally," said Mr Hunt. He added, however, that the relative stability of equity markets in recent weeks had lent support to prospects for economic recovery.

"If that continues, there is no reason to believe that we won't see a rebound in business and consumer confidence," Mr Hunt said.