(adds butcher's comments in 5th paragraph)
By Gavin Jones
ROME, Nov 14 (Reuters) - Italy's economy contracted by 0.5 percent in the third quarter, a bigger slump than expected and its steepest decline in 10 years, data showed on Friday.
The news showed Italy, like its larger euro zone neighbour Germany and the euro zone as a whole, has been in recession since the spring, posting two consecutive quarters of negative growth for the first time since the start of 2005.
That in itself was no surprise, but the 0.5 percent fall in gross domestic product -- following a 0.4 percent drop between April and June -- was steeper than all forecasts in a Reuters poll of 27 analysts.
"Given this is the first reading there are no details, but it is likely the fall was due to a drop in consumption, investments and net exports. Consumption should have contributed the most to the decline," said Carmela Pace of MPS Finance.
"We are in deep, deep crisis, the economy looks like it's slowly dying," said Marco Lavoli, a butcher at a Rome street market. "People have no money anymore, they don't buy. Half-way through the month, they have already dried up their bank accounts."
An ISTAT spokeswoman said the overall situation, considering the size of the growth contractions, was probably the worst since 1992/1993, when there were six consecutive quarterly falls in growth.
"This is clearly worse than the market expected. We probably had a contraction of consumer spending, investments and exports," said Bank of America economist Gilles Moec.
"Unfortunately for Italy it is probably only the beginning," he added, forecasting negative growth also in the following three quarters.
Official statistics agency ISTAT reported GDP was down 0.9 percent year-on-year, the largest drop since the first quarter of 1993, following a 0.2 percent drop in the previous three months. The median forecast in Reuters survey had pointed to a 0.2 percent quarter-on-quarter fall, down 0.4 percent year-on-year.
ISTAT said full-year 2008 growth will come in at -0.3 percent on the technical assumption of zero quarterly growth in the fourth quarter, but most analysts expect fourth-quarter growth to post another fall.
Italy has not posted a full-year GDP contraction since 1993.
One of Europe's most sluggish economies for at least a decade, Italy again underperformed the euro zone average in the third quarter, when the 15-nation bloc posted an average growth decline of 0.2 percent.
That followed a fall of the same size in the second quarter, putting the euro zone in recession for the first time since the launch of monetary union in 1999.
Treasury Chief Economist Lorenzo Codogno said Italy's third-quarter data would hit the outlook for 2009, when the government still has an official forecast of 0.5 percent growth, seen as unrealistic by all private economists.
The International Monetary Fund forecast a contraction of 0.6 percent next year even before Thursday's data. Bank of America's Moec now forecasts -0.9 percent, and economists at Capital Economics forecast -1.5 percent.
Italian manufacturing activity plummeted to its lowest level in at least 11 years in October, the Markit Purchasing Managers Index (PMI) showed. New business levels and corporate morale in the services sector also hit record lows.