By Ainsley Thomson and Alex Brittain

LONDON--U.K. household spending grew at the slowest rate in a year during the final quarter of 2012 as muted wage growth restricted consumers' spending power, data showed Wednesday, illustrating how weak domestic demand is constraining the country's economic recovery.

The data come just days after Moody's Investors Service stripped the U.K. of its triple-A credit rating, saying economic weakness will continue to weigh on public finances for years to come.

In its second estimate of fourth-quarter gross domestic product, the Office for National Statistics confirmed output fell 0.3% compared with the previous three months. For 2012 as a whole, the ONS revised its GDP reading to show growth of 0.2% compared with its previous estimate of flat economic output.

The ONS said household spending on goods and services rose 0.2% in the fourth quarter--the lowest reading since the fourth quarter of 2011, when it also rose 0.2%.

Household consumption makes up about 60% of the U.K.'s GDP, so weak spending has a significant dampening effect on the overall economy.

The ONS said the most pressing source of the continued weak domestic demand is the slow growth in compensation of employees, which increased by 0.1% in the fourth quarter compared with a 0.5% increase in the previous quarter.

In another sign of weak demand, business investment fell at the sharpest rate quarter-on-quarter in almost two years, dropping 1.2% in the fourth quarter.

Write to Ainsley Thomson at ainsley.thomson@dowjones.com and Alex Brittain at alex.brittain@dowjones.com