Australia's business lobby group on Tuesday said small businesses are suffering and will be further hit by this summer's natural disasters.

According to the Australian Chamber of Commerce and Industry ( ACCI) small business survey, the index for business condition fell to 42.0 in 2010 December quarter from 44.6 in the previous three months, below the 50 level that indicated economic conditions among small businesses are in contraction.

Expected Economic Performance fell to 47.4 from 48.9 in the previous quarter.

ACCI director of economics and industry policy Greg Evans said floods and cyclones were a prime cause of concern over recent quarters which dented small business confidence.

"The Australian small business sector is actually not in good shape at the moment," Evans told reporters in Canberra on Tuesday.

"It's lost a considerable amount of its economic momentum."

He said the natural disasters will further dampen small business confidence over the first half of 2011.

All components were below 50 in the quarter, apart from wage growth and non-wage labor costs.

He expressed his most concerns after the reading for profitability, which fell even further to a weak 38.2, one of its lowest levels ever, from 46.2 in September quarter.

"It shows the difficulty that small business have in overall retained earnings and the difficult task they will have in the period ahead in terms of gaining capital for expansion and future employment," he said.

Retail, hospitality and manufacturing businesses were particularly under pressure from rising interest rates and a high Australian dollar.

Evans urged governments to take fairly urgent action on tax reform that would reduce personal income tax and capital gains tax, because he said all these taxes add up to less confidence for business, and much more pressure in terms of profitability in the small business sector.