The collapse of council house repair firm Connaught could be the start of a "whirlwind" that batters the Westcountry as a result of "severe" government spending cuts, an MP has warned.

The Exeter-based company has plunged into administration after months of uncertainty, marking the largest corporate failure in Britain since Woolworths went to the wall two years ago.

Analysts have suggested the firm, whose order book was full of deals to fix social housing stock, entered into a series of unprofitable contracts with councils because it feared the coalition plans would leave it struggling for deals.

Ben Bradshaw, Labour MP for Exeter and a former Cabinet minister, argues the collapse of Connaught is proof that the Con-Lib Government has been too quick to halt public sector investment.

He said: "I'm afraid this is the beginning of the whirlwind that is going to hit the South West because of the Government's crazy and ideological driven reduction plans, which even Boris Johnson has said are wrong-headed and likely to lead to a double-dip recession."

Business leaders in Devon and Cornwall have voiced concern that Connaught's fall from grace will be the thin end of the wedge.

The Westcountry economy is highly dependent on the state, with local councils, the NHS and the Ministry of Defence providing a significant thousands of jobs. Figures from the Office for National Statistics this week showed that around one in five workers in the South West are employed in the public sector.

Connaught has been in turmoil since warning in June that government spending cuts could blow a £200 million hole in revenues over this year and next.

While it started life in 1982 as a concrete repair specialist based in a hut in Sidmouth, East Devon, it now employs around 10,000 people nationwide, including hundreds in the Westcountry.

Mr Bradshaw added: "This is devastating news for hundreds of families in Exeter and a direct result of the Con-Lib Government's housing cuts.

"This is a classic example of how the private sector in areas like housing is dependent on government support, particularly in times of economic difficulty."

He said that "no one denies" that the deficit needs to be reduced. Labour planned to halve the £113 billion annual deficit in four years.

By contrast, the coalition plans to eliminate the deficit by the end of the Parliament in five years' time, arguing that mounting public debt will damage the UK's credit rating and make matters worse.

Charlie Parker, investment editor of financial news organisation Citywire, said he suspected Connaught's fear over spending cuts was leading it to bid too low for contracts. He said: "At a time when local councils are under massive pressure from central government to cut their spending there is going to be a lot of pressure on the contractors that supply things to local councils to cut their bids ever lower."