The local index for June dropped to 36.1, down from 41.6 in May and 55.8 in June 2007.
A PSI reading above 50 indicates the sector is generally expanding and below 50 that it is declining.
"The June result reflects current economic conditions and the mood of consumers generally. Frustratingly, some businesses which could have done better are hampered by staffing shortages," Otago-Southland Em-ployers Association chief executive Duncan Simpson said yesterday.
Cost increases were also a factor in the decline in business activity with the hospitality sector in Otago-Southland particularly hard hit.
The test match at Carisbrook on Saturday and the arrival of snow on the skifields should help boost flagging tills and spirits, he said.
The region was the lowest by far, with the northern region recording 43.9, central 47.9 and Canterbury-Westland 51.1 - the only region to record a rise.
The New Zealand PSI also fell in June to 45.6, the lowest result since the survey began last year.
Four of the five indices that made up the PSI continued to show falls and all exhibited their lowest values to date.
Activity-sales (44.9) had its third consecutive fall and employment (41.8) fell sharply from May.
Supplier deliveries (42.7) fell, but new orders-business (51.4), while falling, stayed in positive territory.
BNZ senior economist Craig Ebert said the "obvious slump" in the employment sub-index fitted with other measures that warned that the jobs market was about to come off the boil more obviously than had been the case in the official records to date.
Both the performance in manufacturing index and the quarterly survey of business opinion last week signalled a general cooling in the business sector's requirement for extra workers.
A net 6% of the quarterly survey respondents said they intended to reduce staff.
Firms had little option but to prune costs in reaction to the declining economic situation and outlook and falling profitability, he said.
Stalling, perhaps falling, employment would maintain downward pressure on total household income and spending.
The process would be exacerbated by the way the softening in employment would also take the steam out of wage inflation.
"Gone are the days where many had alternative jobs they could jump to which would guarantee a big pay rise jump whether one actually moved or not.
"We suspect this will cause the biggest angst among the younger generation, who seem to have taken the recent boom years as the norm as to how labour markets operate."
They would be in for the rudest shock when they experienced, for the first time in their working lives, the down part of an economic cycle, Mr Ebert said.
