Mervyn Davies said a political climate created by the Brexit vote had caused a collective loss of reason in the country.
And the former trade minister said Britain was increasingly pushing through knee-jerk, short-term economic measures rather than long-term plans.
He told the Financial Times City Network debate: “Confidence in Britain is falling.
“It feels as if we are having a nervous breakdown as a country with only the far left and far right having a voice.”
He claimed politicians were ignoring the national interest in favour of their own short-term gains.
Mr Davies said: “We are snatching defeat from the jaws of victory and politicians have three interests, in this order: their careers, their parties and then the country.
“At least that’s how it appears.
“We now need to quickly reassure foreign direct investors that we have a vision for our country.
“Skills, apprenticeships, vocational training and a focus on productivity and infrastructure are now critical moves.
His comments come at a time when the extreme left is increasingly dominating Jeremy Corbyn’s Labour party.
Theresa May is also under pressure from more right-wing Tories over the Government’s direction, with many calling for a hardline against the EU in particular.
Mr Davies, an ex-banker, was joined by a number of other senior City figures at the forum this week.
And many warned that more needed to be done to bolster the UK economy as the country heads towards Brexit, the paper reported.
RateSetter chief exec, Rhydian Lewis, said: “The economy is crying out for the Government to be brave.”
And, despite a generally warm reception for Philip Hammond’s Budget, it was claimed the Chancellor’s measures had not gone far enough.
Institute of Directors Chairman, Barbara Judge, said: “With the next Budget too close to the EU exit door, this was the last opportunity to have real impact on shaky business confidence.”
Last week, Britain’s fiscal watchdog revised down its growth predictions as the nation looks set to struggle with “stubbornly flat” productivity and weaker business investment.
In its independent forecasts, the Office for Budget Responsibility (OBR) downgraded gross domestic product forecasts (GDP) from 2 per cent to 1.5 per cent for this year.
It also cut the GDP outlook from 1.6 per cent to 1.4 per cent in 2018, with a further fall to 1.3 per cent estimated in 2019.
But Elizabeth Corley from Allianz Global Investors claimed Brexit was being used as a scapegoat to cover-up shortcomings in the UK economy.
She told the panel: “The economy isn’t going to grow fast enough in the coming years to plug the gaps but at least now we have an alternative root cause to blame.
“Weak productivity is the reason, not Brexit, and it is far more unifying — rather like identifying Russia as a major threat as an alternative foreign policy dilemma to Europe.”