(Adds background, analyst comment, market reaction)
By Anna Ringstrom
STOCKHOLM, Feb 10 (Reuters) - Swedish industrial output and order intake fell by more than a fifth in December, data showed on Tuesday, pointing to dismal numbers for the overall economy and setting the scene for a hefty policy rate cut this week.
Industrial output fell 20.3 percent year-on-year and 5.1 percent from November, the statistics office said. Orders slumped 22.0 percent from a year earlier.
The central bank, which meets to discuss rates on Tuesday, is widely seen slashing its key repo rate, currently at 2.00 percent, by 50 or even 75 basis points to invigorate Sweden's export dependent economy.
The rate announcement is published at 0830 GMT on Wednesday.
"Lousy production numbers and order intake indicate that there is no apparent end" (to the economic downturn), said Henrik Mitelman, analyst at SEB. "In all, this gives the Riksbank good reason to cut aggressively tomorrow."
The Nordic region's biggest economy slid into recession in the third quarter and is expected to keep declining this year as the global financial crisis erodes demand worldwide.
Evidence of the downturn has piled up in recent weeks as the country's top-flight manufacturers have unveiled fourth-quarter reports of weak demand and slashed production plans.
All this sets the stage for gross domestic product (GDP) data, due on Feb. 27, to show a sharp contraction.
"Industrial production has dropped every month during the last quarter of 2008, indicating a very weak outcome for fourth quarter GDP," Nordea analyst Bengt Rostrom said.
"The manufacturing sector will continue to contract in the first quarter of 2009. This is one more factor to take into account for the Riksbank, when deciding on the repo rate at the monetary policy meeting later today."
Many of Sweden's biggest industrial firms reported lower earnings in the fourth quarter and world number two truckmaker Volvo, which has said it will cut thousands of jobs in the coming months, even skid to a loss.
Knut Hallberg, analyst at Swedbank, said Wednesday's data showed a collapse in industrial activity.
"This indicates a very weak GDP development in the fourth quarter and a weak beginning of the first quarter. This also increases the probability of the Riksbank's cutting its key rate by more than 50 basis points," he said.
Swedish bond yields fell and the crown weakened against the euro after the news.
(Additional reporting by Love Liman and Johan Sennero; Editing by Ruth Pitchford)