(Recasts with economists, Q3 labour costs)
By Jan Strupczewski
BRUSSELS, Dec 12 (Reuters) - Euro zone industrial output fell the steepest in more than 15 years in annual terms in October, data showed on Friday, in a sign the recession was deepening in the last quarter of 2008.
More signs of future trouble came from a surge in hourly labour costs in the third quarter, which economists said would cause a fall in corporate investment and sackings as demand collapses.
Economists said the production data added to arguments that the European Central Bank should keep on cutting interest rates in January after three successive cuts in October, November and December by a total of 175 basis points to 2.5 percent.
Industrial output in the 15 countries using the euro fell 1.2 percent on the month for a 5.3 percent annual drop, the sixth straight fall in annual terms and the deepest decline since July 1993, when it fell 5.5 percent, European Union statistics office Eurostat said on Friday.
Economists polled by Reuters had expected a 1.0 percent monthly fall and a 3.6 percent year-on-year decline.
"The sharp fall in industrial production in October adds to the clear evidence that the euro zone recession is deepening and reinforces belief that GDP will contract more markedly in the the fourth quarter than in the third and second quarters," said Howard Archer, economist at Global Insight.
Eurostat also revised its September output data to a 1.8 percent monthly contraction from the previously reported 1.6 percent drop and a 2.7 percent annual fall from 2.4 percent.
The data showed industrial production was pulled down by plunging output of consumer and intermediate goods, which is in line with the steep drop in investment that helped drag the euro zone into its first ever recession in the second and third quarters and falling consumer confidence on job concerns.
"This intensifies pressure on the ECB to deliver further interest rate cuts. While the ECB is currently keeping its cards close to its chest and indicating some reluctance to cut interest rates sharply further, we still believe that another reduction in January is more likely than not," Archer said.
Eurostat said euro zone hourly labour costs rose 4.0 percent in the third quarter against the same period of 2007 -- a sharp acceleration from the 2.8 percent rise in the second quarter.
The ECB has been worried that wage growth may fuel a wage-price spiral, but economists said that with demand falling in the recession-hit economy, most of the higher cost would eat into company profit margins, rather than boost inflation.
"Taken together with slowing demand and tighter credit conditions, we think that a sharp retrenchment by companies is on the cards. The result will be a major investment slump and declining employment," he said.
Economists also noted the labour cost data was a backward looking indicator.
"There is no doubt that in the current environment the ECB should be much more concerned by the steep industrial production and GDP drop than accelerating labour costs," said Marco Valli, economist at Unicredit.
"The latter, in fact, is a lagging indicator that still reflects the past strength of the labour market, which is now gone -- our employment indicator suggests that hiring has virtually come to a halt, and employment will soon start contracting," he said.
"Accordingly, the ECB should refrain from considering any pause in the easing cycle to avoid falling again behind the curve," he said. (Reporting by Jan Strupczewski; Editing by Dale Hudson/Victoria Main/Tony Austin)