Economic prospects remain 'fragile' as firms still lack the confidence to invest for growth, according to new research today.

A survey of 1,800 companies by Lloyds TSB Commercial found a continued lack of domestic demand, leaving the outlook for profits 'weak'.

Business confidence has improved, but the economic recovery was said to be 'sluggish', with profitability remaining a big concern.

One in five businesses expected to increase their level of investment over the coming six months, while a similar number planned cuts.

John Maltby, managing director of Lloyds TSB Commercial, said: "With domestic demand in the doldrums, and confidence still muted, it is understandable that firms are worried about investing for the future.

"The fact is that if businesses do not invest, it could damage an already fragile recovery, and result in even slower growth."

London was the most confident business region, although firms in Wales reported a 'dramatic turnaround' in recent months, while the North East and North West were the least confident regions.

Companies in the hospitality and leisure, business services and manufacturing showed strong levels of confidence, with a less positive outlook reported in healthcare.

Trevor Williams, chief economist at Lloyds Bank Corporate Markets, said: "Businesses are on a better footing than they were at this point last year but they need to steer the right course between domestic and international markets in order to ensure their prospects for the coming year are positive.

"As inflation is expected to peak later this year or early in 2012 and the underlying economic recovery remains intact, the hope is that businesses that are currently putting plans on hold will have the confidence to ramp up their investment spending.

"Our latest report underlines the view that the pace of economic recovery is still sluggish but, risks notwithstanding, we believe the recovery will continue in the second half."