Companies linked lower output to reduced intakes of new work, weaker market demand, difficulties in sourcing components and transportation delays, according to a report by the market intelligence company S&P Global.
The results indicating the first output drop in two years "should make business leaders and policymakers sit up and take notice," said Duncan Brock, group director at the Chartered Institute of Procurement & Supply (CIPS).
Output from the consumer goods sector went into contraction along with new orders and the signs show this trend will continue towards the autumn months, Brock added.
In July, the S&P Global / CIPS UK Manufacturing Purchasing Managers' Index also fell to a 25-month low of 52.1, from 52.8 in June.
It "suggests the sector is on the brink of recession, as very high prices and the end of the restocking cycle weigh on production," said Gabriella Dickens, senior UK economist at the consultancy Pantheon Macroeconomics.
Also on Monday, the Institute of Directors, a UK professional organization, released its Directors' Economic Confidence Index for July, which measures business leaders optimism in prospects for the UK economy.
The index remained "very low" at minus 54, and the main reasons for the pessimism included UK's inflation rate, the difficulties in the country's trading relationship with the European Union and political instability in the UK government, according to the organization.
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