(Updates with analysts' comments)
By Marcin Grajewski
BRUSSELS, March 27 (Reuters) - Factories in the euro zone saw demand shrink by over a third in January from a year earlier, the biggest ever such drop, data showed on Friday.
Industrial new orders in the 16 countries using the euro fell 3.4 percent month-on-month in January for a 34.1 percent annual decline, the steepest fall since measurements started in 1996, European Union statistics office Eurostat said. Economists polled by Reuters had expected an annual decline of 28.7 percent.
Eurostat also revised down December order figures to -8.0 percent on the month and -23.8 percent year-on-year, from previous readings of -5.2 percent and -22.3 respectively.
The data pointed to deep recession in the currency area as the world struggles with the worst financial crisis in decades. Car makers and other industries face stoppages and governments are launching aid programmes.
"The outlook continues to remain very grim for the first quarter and probably the second quarter as well. There are no signs whatsoever of an improvement in real activity," said Giada Giani, analyst at Citigroup.
Demand fell for all categories of goods, although producers of non-durable consumer goods suffered the least, Eurostat said.
Germany, the euro zone's largest economy, saw the heftiest orders decline in the currency area -- by 7.6 percent month-on-month and 37.7 percent annually.
In France, the second-biggest economy in the bloc, they fell by 1.4 percent from December and 30.9 percent from a year ago.
But the data offered some hope for Ireland, which has been hit especially hard by the crisis in the euro zone, showing a 16.6 percent increase in orders month-on-month for a 7.2 percent annual gain.
ECB MEETING LOOMS The figures strengthened expectations that the European Central Bank would cut interest rates once more at its meeting next week, after it cut borrowing costs to an all-time low of 1.5 percent.
"Plunging industrial orders in January reinforces fears that Eurozone GDP will contract in the first quarter of 2009 by even more than the 1.5 percent quarter-on-quarter drop seen in the fourth quarter of 2008," said Howard Archer, chief European economist at IHS Global Insight.
"Consequently, there is intense pressure on the ECB to cut interest rates further at its April 2 policy meeting, and we expect the bank to deliver another 50 basis points reduction from 1.50 percent to 1.00 percent," he added.
Eurostat said orders excluding volatile transport equipment -- motor vehicles, ships, trains and planes -- dropped by 3.3 percent on the month and 34.1 percent year-on-year.
The figures for capital goods plunged 4.4 percent from the previous month and 39.7 percent in annual terms. For durable consumer products, orders fell by 1.1 percent and 25.7 percent respectively.
Non-durable consumer goods declined 2.3 percent on the month and 10.6 percent year-on-year.
Eurostat also said that in the wider 27-nation European Union, industrial new orders fell by 2.2 percent month-on-month and 30.7 percent annually. (Writing by Marcin Grajewski, editing by Mike Peacock)