Nationally, the Business New Zealand performance of services sector for the quarter was down one point from August at 46.9, while in Otago and Southland it was down 2.3 points over the same period, to 37.
A reading above 50 indicates expansion, below 50 contraction.
A year ago, the national performance was 59, and for Otago and Southland, it was 61.9.
Business New Zealand's head of research, Stephen Toplis, said the weak data would lend further weight to the Reserve Bank easing interest rates later this week.
Otago Southland Employers Association chief executive, Duncan Simpson, said he has had reports from some in the hospitality industry of lighter-than-usual bookings for Christmas functions, which supported a weakening in the sector's index.
The contrast for the region between this year and last could not be more marked, he said.
"This time last year we were cracking along on all eight cylinders and leading the country. It's a complete mirror [opposite] of what we saw last year."
Mr Simpson said 80% of comments attached to the recent September survey forms point to a softening in the economy that is drying up business.
The survey occurred before October's tax cuts and an easing in petrol prices, events he said would have boosted people's confidence.
The South's weak performance was consistent with other regions except Central.
Mr Simpson did not expect a rapid recovery.
"I think we will see a bit more of this until people figure out what is going on."
A key would be what the Reserve Bank does to the official cash rate later this week, but equally, an easing in interest rates would impact the incomes of those living on interest earned on savings.
Business New Zealand chief executive, Phil O'Reilly, said activities and sales were low for the past two months, and new orders and new business had declined for the first time.
"This does not bode well for activity during the last quarter of 2008 which, for many service sectors, is the prime period for sales leading into Christmas."
Nationally, survey respondents highlighted concerns about the economic downturn, a lack of consumer confidence, and concerns about cash flow.
Mr Toplis said while the outlook for the economy was deteriorating, inflationary pressure was easing.
He believed that by next September, inflation would return to the Reserve Bank's target band and be on its way to below 2%.
