The Australian Industry Group-Housing Industry Association performance of construction index (PCI) fell 11.3 index points to 31.8 points in September, its weakest reading since the survey was established in September 2005.
The index was below the key 50 level, which separates expansion from contraction, for the seventh straight month.
"The continued fall in construction activity reflected widespread reports of weak market demand and a shortage of new project work," the survey, released on Tuesday, found.
"The overall negative viewpoint of firms was also linked to economic uncertainty and the credit squeeze which were seen as the principal causes of on-going delays in building commencements."
The sharp decline in activity and new orders also caused companies to reduce their workforces at the fastest rate in the three-year history of the survey.
The employment sub-index fell 15 index points in September to 30.9 points.
"Adding to the pressures on the industry is the continued rise in input costs, which is squeezing profit margins," Australian Industry Group associate director of economics and research, Tony Pensabene, said in a statement.
"New orders for the industry as a whole are now at their lowest level in three years, signalling that the current weakness in activity is likely to continue during the months ahead."
Pensabene said the survey's result for September reinforced "the need for the RBA (Reserve Bank of Australia) to cut the official cash rate".
The RBA cut the cash rate by 100 basis point cut to six per cent at its October board meeting on Tuesday.
Housing Industry Association chief economist Harley Dale said the deterioration in construction conditions had intensified in 2008/09.
"In terms of residential construction, the renewed weakness in activity looks set to extend well into 2009, highlighting the urgency for appropriate action from the RBA today to ensure mortgage relief is immediately forthcoming," Dale said.
