The Markit/CIPS survey, where a reading above 50 represents growth, showed overall activity in the sector fell to 49 in June from 50.9 the previous month – the second lowest reading since February 2010.
Residential building was the worst performing area, while there was a decline in commercial construction, albeit marginally, for the first time in two and a half years.
Howard Archer, chief UK and European economist, said: “The construction sector is currently hampered by major headwinds, notably including public spending cuts, a weak economy, a struggling housing sector, and problems in getting funding for large-scale projects.”
While the construction sector only accounts for roughly 7 per cent of the total economy, it has weighed on overall output, declining by 3.9 per cent in the second quarter of 2012, contributing to the 0.5 per cent slide in gross domestic product (GDP).
However, the picture for the third quarter is mixed after figures on Monday showed a rebound for the manufacturing sector in August.
Markit said that new orders declined for the third consecutive month in August, with the latest fall being the fastest since April 2009.
The decline in output meant that employment levels stagnated in August, continuing the trend seen on average throughout the summer. Elsewhere, companies indicated that their business confidence weakened for the fourth time in the past five months during August.
Adding to the sector’s woes were signs of an accelerated pace of input price inflation with the latest rise in cost burdens the fastest since March.
Markit senior economist Tim Moore said it was likely that the construction sector as a whole will decline in 2012. He said: “August data reaffirms that UK construction firms are suffering a prolonged downturn in new work and there is little evidence to suggest an imminent rebound in output levels.”
Mr Archer said the data highlighted the need for government initiatives to try and lift infrastructure activity and housebuilding.
The Government has already launched a number of initiatives to revive growth in the sector, pledging to back up to £50bn worth of infrastructure and house building investment through state guarantees.
However, the government has so far shied away from increasing public infrastructure spending outright, which many economists and business groups are calling for, as its hands are tied by its pledge to erase a huge budget deficit.