Heavy discounting by retailers over Christmas failed to entice shoppers into splashing out on goods, according to new research.
UK spending in December fell by 1.1% from the previous month while it dropped by 0.8% compared with December 2010.
Despite being the season of celebration, sales of food, beverages and tobacco saw a sharp year-on-year fall of 5.3%.
Spending on transport and communication also saw a huge annual decrease, of 5.8%.
The fall came despite retailers beginning their seasonal sales earlier than normal in an attempt to encourage people onto the high street after a tough year.
Visa, which compiled the figures, said consumer spending had not recovered since a peak in 2007. Shoppers were increasingly cautious amid an uncertain economic backdrop, according to the credit card firm.
Shopping by mail and telephone order saw a 3% year-on-year decline, while face-to-face spending decreased by 1.4%. Online shopping saw a more modest annual decline of 0.4%.
It is the first time in two-and-a-half years that a year-on-year decline has been recorded for all three of these methods.
Visa's UK Expenditure Index uses spending on its cards as a base, but the figures are adjusted to reflect overall consumer spending, not just that on Visa cards.
Chris Williamson, chief economist at Markit, which compiles the index, said: "With the consumer accounting for approximately two-thirds of all expenditure in the economy, the downturn clearly adds to worries that the UK may be sliding back into recession.
"The data also highlights the plight that retailers have suffered over the key Christmas trading period, with even online sellers not immune to households' increasing reluctance to spend."
Dr Steve Perry, commercial director at Visa Europe, added: "Against a backdrop of challenging economic circumstances, consumers' uncertainty translated into subdued Christmas spending, despite heavy discounting both on the high street and online."
Meanwhile, other figures showed an increase in the number of retailers falling into administration during the normally lucrative Christmas season.
Research by Deloitte found a total of 42 retailers in England and Wales went into administration in the final quarter of 2011 compared with 33 in the previous three months, a rise of 27%.
The number of retailers falling into administration over the year rose by 11%, with failures totalling 183.
Both reports came as Britain's fourth largest supermarket Morrisons reported a slowdown in sales growth.
Store sales (excluding fuel and VAT) rose by just 0.7% in the six weeks to January 1, down from 2.4% the previous quarter. City analysts had expected growth of 1%.
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