The amount of money invested in start-up companies nationwide declined again in the third quarter, and the number of new companies receiving funding fell to the lowest level since 1994 as the venture capital industry continued to struggle through its sharpest downturn in a generation.

During the three months ended Sept. 30, 647 start-ups raised $4.5 billion from venture capitalists, down 25 percent from the previous quarter, according to the MoneyTree survey of national venture capital investing. And just 159 new companies raised their first round of funding in the third quarter as venture funds continued to spend most of their time and money on their earlier investments.

"They're keeping their powder dry to support their existing companies," said Robert E. Grady, a general partner at the Carlyle Group in San Francisco.

The latest investment numbers contrasted with those from the prior quarter, when the survey showed that investment activity fell only 6 percent. That led many to believe that the industry was close to a new level of sustainable investment, finally stemming two years of consecutive declines. But the slow activity this summer has shown that investing has not yet hit bottom.

Weighing heavily on the minds of investors is continued economic uncertainty, which is cutting demand for many of the products and services sold by venture-backed start-ups, and stock market volatility, which makes it more difficult for venture investors to initially set values for their investments and ultimately reap profits through initial public offerings of stock.

"The nature of venture capital investing is to begin with cash and end with cash," said John Taylor, vice president for research at the National Venture Capital Association. "What we're seeing in the investment cycle is crimps at both ends."

The MoneyTree survey is conducted each quarter by PricewaterhouseCoopers LLP, research firm Thomson Venture Economics and the NVCA, an industry trade group.

Despite a 33 percent drop in investment activity, Silicon Valley remained the undisputed king of venture capital. In the third quarter, 161 companies raised $1.4 billion in that area, down from the $2.1 billion raised in the prior quarter. In New England, the second most active region, $559 million was invested in the third quarter in 81 companies, down 29 percent.

Washington area venture capital activity fared better, totaling $272.9 million for 51 companies, down 1 percent. Investments in software companies, traditionally the most common types of venture investments because of their low funding requirements and faster development times, helped boost the area's fortunes. Fifteen software start-ups raised $99.2 million locally, up 47 percent from the prior quarter.

Software companies were at the head of the pack nationally as well, raising $993 million, a decline of only 10 percent from the prior quarter and accounting for nearly a quarter of all the money invested, while investments in telecom firms continued to falter, dropping 32 percent.

"Software is once again leading venture capital back to its roots," said Tracy Lefteroff, a global managing partner at PricewaterhouseCoopers. "It declined at about half the rate of overall investing."

In contrast to the flood of money raised in recent quarters by biotechnology companies, investments in that sector also fell sharply in the third quarter, down more than 50 percent.

"Gravity finally caught up with this sector," said Lefteroff.

For the whole industry, gravity has now pulled investment down 85 percent from a high of $29.1 billion in the second quarter of 2000.