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Confidence among small businesses fell at the end of last year, knocked by December's severe weather and the rise in VAT to 20% at the beginning of 2011, a survey has said.

The Federation of Small Businesses' (FSB) quarterly survey said that confidence in the service and transport sectors had been particularly affected.

The FSB also warned that growth in 2011 was likely to be "sluggish at best".

It said more small firms were expecting to shed staff this year.

Some 12.4% of firms said they were expecting to reduce their staff numbers, up from 10.4% in the previous quarter.

"Overall, the figures show that the private sector recovery lost momentum in 2010, and as the constraints on businesses cash-flow increased from utility bills, fuel duty and VAT combined with the public sector cuts, growth in 2011 is also likely to be sluggish at best," the FSB said.

The organisation is calling on the government to introduce a fuel duty stabiliser - lowering duty when pump prices rise - and wants the Bank of England to keep interest rates at 0.5% "to help keep the focus on growth".

A separate report by the Ernst & Young Item Club economic forecasters also urged the central bank to "hold its nerve" and avoid pressure to raise interest rates.

The Item Club said that any rise in rates this year would result in a "depressed economy".

Accountancy and consulting firm Deloitte has also warned of a "bumpy road to recovery".