Business conditions slumped to their lowest in October, following a significant slowdown in activity in the construction and retail sector.

The National Australia Bank (NAB) business conditions index for October declined from 7 to 2 index points, still above the level that separates expansion from contraction but well below the long-term average of 6.

Significant falls were seen in trading and profitability, leaving the "nascent recovery" recorded in the September survey "on hold".

The profitability index dropped to -4 from 6, going into negative territory for the first time in more than two years as prices weakened.

The trading index fell from 13 to 4 over the same period, while retail conditions trended down for the first time since September 1997.

Leading the monthly fall were the construction and retail sectors, which slid to -10 and -13 points, respectively.

"Conditions continue to vary widely across the economy and in some sectors, notably construction, have been particularly volatile - which could well indicate a turning point," NAB said.

"The large fluctuations in construction conditions largely reflect movements in trading conditions and profitability.

"Employment has been strong in the construction sector for the past three months."

Employment conditions strengthened, the survey said, while mining, transport, utilities and personal services built on gains from the previous month.

"However, conditions in construction fell sharply into negative territory and retail remained very depressed," according to the survey.

"Confidence is mixed, but overall softened to around trend." The business confidence index fell from 10 to 8.