Over £55 billion of debts held by UK firms in financial trouble could spark a "ripple effect" of distressed businesses that might threaten economic recovery, a report has warned.
According to the latest Begbies Traynor Red Flag report, the number of businesses deemed in "significant" or "critical" financial pain has jumped 14% from the last three months of last year, to 161,601 in the first quarter of 2010.
The group said these firms are thought to owe more than £55 billion to banks and trade suppliers and said while it is the first time it has measured the level of liabilities at risk of default, it believes the figure has risen.
Begbies said although the economy appears to be picking up, the scale of the debts indicated the "potential far-reaching effect of these levels of distress".
The group is concerned about about a "ripple effect", where the failure of one firm topples several others, and warned that this "represents a real threat to a sustained economic recovery".
It is the second successive quarterly increase in numbers of distressed businesses, although the group said about half the latest rise could be attributed to seasonal factors, with the rest down to market deterioration.
However Begbies, whose figures showed the number of companies in trouble was 13% less than the same period last year, said the economy "appears to have turned the corner".
Nick Hood, senior London partner at Begbies Traynor, said the potential for ripple effects was a particular problem in the recession-hit property and construction industries.
According to the research, the number of property services companies listed as in financial distress soared by 42% from the fourth quarter of last year to 16,385. The number of construction firms facing difficulties also rose 30%, to 22,990.
"Of all the sectors in the economy that are under stress, construction and property are by far the most vulnerable," Mr Hood said.