* Industrial output down 2.0 pct m/m, 20.2 pct y/y in March
* Year-on-year drop sets record, worse than forecast
* Q1 GDP may have contracted more than economists expect (Adds Reuters poll, economist, background)
By Jan Strupczewski
BRUSSELS, May 13 (Reuters) - Euro zone industrial production plummeted by more than a fifth year-on-year in March, data showed, setting a record and indicating first-quarter economic output could have contracted more than expected.
Industrial production in the 16 countries using the euro fell 2.0 percent month-on-month and 20.2 percent year-on-year, the European Union's statistics office, Eurostat, said on Wednesday.
Economists polled by Reuters had expected a 1.0 percent monthly decline and an 18.0 percent year-on-year drop.
"This sure is a horrible number," said Kenneth Broux, economist at Lloyds TSB Corporate Markets.
The data offered no cause for optimism about "green shoots" of economic recovery, seen in some forward-looking business surveys, economists said.
"There are no green shoots here, everything is either a quarter or a fifth down on the year," said Stuart Bennett, European economist at Calyon. "Perhaps Q2 GDP will prove better than Q1 but the outlook remains very weak."
Economists polled by Reuters expect first-quarter GDP to have shrunk by 2 percent, and see a contraction of 0.6 percent in the second quarter. A Eurostat estimate of first-quarter GDP is due on Friday at 0900 GMT.
Industrial production accounts for roughly 17 percent of euro zone gross domestic product and the grim March output data could mean the economy shrank more than economists expect.
"Following today's release this indicator is pointing to a -2.2-2.3 percent quarter-on-quarter reading in Q1. This suggests downside risks to our 2 percent forecast," said Saleem Bahaj, economist at Goldman Sachs.
Q1 GDP COULD CONTRACT MORE THAN 2 PERCENT Q/Q
Eurostat also revised down production data for February to a monthly fall of 2.5 percent from the initially reported decline of 2.3 percent and, in year-on-year terms, to a plunge of 19.1 percent from 18.4 percent.
"Together with downward revisions to the previous monthly outcomes, this left output down by an astonishing 7.9 percent in the first quarter, compared to a 6.5 percent fall in the fourth quarter," said Nick Kounis, economist at Fortis.
"The outcome is consistent with GDP contracting by just above 2 percent quarter on quarter in Q1, following the 1.6 percent fall seen in the previous quarter," he said.
The production drop resulted from a 27 percent annual fall in the output of intermediate goods and drops of more than 23 percent in the output of capital and durable consumer goods.
"Fortunately, more recent evidence indicates that the second quarter will be considerably less negative and we continue to expect the economy to stabilise in the second half of the year," Kounis said.
Economists in the Reuters GDP poll see a 0.2 percent contraction in the third quarter and 0.1 percent growth in the final three months of this year.
In Germany, the euro zone's biggest economy, production in March eased only 0.4 percent month-on-month, Eurostat said, apparently bottoming out after monthly drops of 6.2 percent in January and 3.7 percent in February.
But France and Italy, the second and third biggest respectively, offered no relief with steeper-than-expected monthly output falls of 1.4 percent and 4.6 percent in March against -1.0 and -4.6 percent in February.
Economists also said that, sooner or later, manufacturers were bound to benefit from a move to replenish inventories, which must have fallen in recent months as production shrank.
But the timing for that was unclear. The latest European Commission survey for April showed companies still saw their stocks as too high.
"With firms likely to continue to run down their stocks, the industrial sector looks set to act as a drag on the economy for some time yet," said Ben May, economist at Capital Economics. (Editing by Mike Peacock and Andy Bruce)