By James Davey and Kate Holton
LONDON (Reuters) - Britain's descent into political crisis just days before Brexit talks begin has sapped confidence among business leaders and infuriated bosses who were already grappling with the fallout from the vote to leave the EU.
The failure by Prime Minister Theresa May to win a parliamentary majority in last week's election has pushed the world's fifth largest economy toward a level of political uncertainty not seen since the 1970s.
May called the election to secure a mandate for her vision of a "hard Brexit" -- driving down migration by taking Britain out of the single market and the customs union.
Instead, she got a hung parliament in which no single party has a majority. Business leaders demanded a re-think.
"The UK has had a reputation, earned over the generations, for stability and predictability in its government," a senior executive at a multi-national company listed on the London FTSE 100 told Reuters on condition of anonymity.
"That reputation in 12 months has been destroyed, truly destroyed. First by Brexit and now through this election."
A survey by the Institute of Directors (IoD) found only 20 percent of its nearly 700 members were now optimistic about the British economy over the next 12 months, compared with 57 percent who were quite or very pessimistic.
The IoD survey, taken after the election, found a negative swing of 34 points in confidence in the economy from its previous survey in May.
"It is hard to overstate what a dramatic impact the current political uncertainty is having on business leaders, and the consequences could – if not addressed immediately – be disastrous for the UK economy," said Stephen Martin, director general of the IoD.
The collapse in confidence, which follows a short-term drop after last year's Brexit vote, coincides with a slowdown in the wider economy that has taken hold since the start of this year, as rising inflation pushes up the price of goods.
Figures from credit card firm Visa showed British consumers turned more cautious even before the shock election result, with households cutting their spending for the first time in nearly four years last month.
The Confederation of British Industry (CBI) warned there was now a risk businesses would cut back on investment which has largely held up since last year's Brexit vote.
And the trade group that represents manufacturers, the EEF, said its members were having to navigate the most uncertain political territory in Britain for decades.
Both groups called on the government to rethink its approach to Brexit, saying the country needed tariff-free access to the single market and a steady flow of migrant workers.
Some executives hoped the political paralysis would lead to a 'softer Brexit', with access to markets prioritized over a clamp down on immigration.
"Here we are again: another bolt from the blue, a political earthquake that we didn't think used to happen in the UK," CBI Director General Carolyn Fairbairn said at a conference hosted by the Resolution Foundation.
"But I do think there are opportunities in this, and it is an opportunity to refocus back on the economy to talk about jobs, growth, future prosperity."
Having slid to its lowest for nearly two months against the dollar on Friday, the pound fell broadly again on Monday.
LEFT IN LIMBO
Business executives warned the political uncertainty could be felt across a wave of sectors.
Leaders of the drugs industry warned of the hazards of government limbo at a critical time for the highly regulated sector as companies seek clarity on the rules that will govern their business after Brexit.
Andy Bruce, the CEO of Lookers (L:LOOK), one of Britain’s biggest car dealerships, said the lack of a clear result meant the highly successful industry had now entered "uncharted waters" in terms of how many new cars it could sell.
And Martin Sorrell, CEO of WPP (L:WPP), the world's largest advertising agency, told Reuters he feared increased economic uncertainty, which meant "weak investment and postponement of decision making."
"Now it seems that we could have no deal because of the short time fuse and lack of decisive government decision making, or a soft Brexit, the latter with more movement and membership of the single market," he said.
Bankers, at the heart of London's huge financial center, cautioned of the impact on takeover activity.
"So long as uncertainty is there I don't see that as particularly positive for M&A in the short term," Karen Cook, chairman of investment banking at Goldman Sachs (NYSE:GS) said at the Reuters Global M&A summit.
Gareth Vale, marketing director at recruitment group Manpower, said its clients were very apprehensive, and had not yet fully grasped the impact that Brexit would have.
"I think the uncertainty around Brexit, and more recently the general election, has created a sense of almost inertia, which has prevented them from considering some of the bigger seismic shifts that are on the horizon."