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By Dave Graham
BERLIN, Dec 8 (Reuters) - German industrial production fell sharply in October, pointing to a weak reading for the euro zone and sparking fears the economy's fourth quarter performance could be one of the worst since Germany reunified in 1990.
Dragged down by an ongoing slump in manufacturing activity, output in Europe's largest economy declined by a larger-than-expected 2.1 percent on the month in October, preliminary Economy Ministry figures showed on Monday.
Output in the euro zone was seen down by 1.0 percent on the month in October, according to a Reuters poll.
The second big monthly drop in a row may raise pressure on Chancellor Angela Merkel's government to beef up its response to the economic crisis and also increase support for further interest rate cuts by the European Central Bank.
"October's fall in German industrial production is further worrying evidence that the earlier driver of the recovery is now acting as a heavy drag on the economy," said Jennifer McKeown, an economist at Capital Economics.
With other indicators painting a bleak picture, German gross domestic product is likely to contract for a third straight quarter in the October-December period, she added.
Ralph Solveen, an economist at Commerzbank, said the economy would likely contract by more than one percent in the quarter -- which was only happened once before since reunification in 1990.
"The ECB will surely continue to cut rates in the next months. We expect the benchmark rate to fall below two percent in the spring," Solveen said.
"The government will also consider new measures at the start of next year to help the economy get back on track."
CARMAKERS STRUGGLE
The Economy Ministry admitted the outlook was bad.
"Given the decline in manufacturing orders that has been going on for months, industrial output should continue to weaken in coming months," the ministry said in a statement.
The fall was worse than the 1.5 percent drop forecast in a Reuters poll, raising the likelihood of a bigger than expected decline for the euro zone, which is due on Friday.
Data on Friday showed German manufacturing orders fell more than six percent in October after a record decline the previous month, stirring fears that the German economy could next year be facing its biggest contraction since World War Two.
Orders have fallen nearly every month since the end of last year, and sentiment among manufacturers has plummeted.
Carmakers such as BMW and Daimler have announced cuts to production due to falling demand, and analysts expect unemployment to start rising again soon.
"Many car makers have cut production sharply. This had a big impact on the fall, especially as many parts' suppliers have hit the brakes too," said Antje Hansen, an analyst at HSBC Trinkaus.
Domestic car sales are on track for their worst year since German reunification in 1990, and 2009 will only see things get worse, the country's main carmakers lobby has forecast.
A breakdown of the figures showed that manufacturing production fell by 2.2 percent in October, with construction output down by 3.0 percent. Energy output rose by 0.2 percent.
The chief economist of Deutsche Bank, Norbert Walter, said earlier this month German gross domestic product (GDP) could shrink by as much as 4 percent in 2009. (Additional reporting by Noah Barkin and Anna Brooke; Editing by Andy Bruce)