By James Mackenzie
PARIS, May 11 (Reuters) - Industrial production in France and Italy dropped more sharply than expected in March, according to data on Monday that pointed to a severe contraction in first quarter output for the whole of the euro zone.
Coming after more positive recent business confidence surveys had led to increasing talk that the worst of the crisis had passed, the data underlined the gravity of the situation facing European manufacturers.
Italian seasonally adjusted output tumbled 4.6 percent in March from the previous month and on a work day-adjusted basis dropped 23.8 percent year-on-year, the heaviest fall since the series began in 1990, statistics office ISTAT said.
In France, output was down 1.4 percent from the previous month and production in the first three months of the year was 15.5 percent below the level of the same period last year, French statistics agency INSEE said.
In both countries, the monthly declines were more than twice as steep as economists had been expecting and contrasted with an unexpected stabilisation in industrial production reported last week in Germany, the euro zone's biggest economy.
France and Italy both saw falls in manufacturing, which represents the bulk of the index, and energy output but analysts noted that the pace of the fall had slowed in France after severe drops in previous months.
Greece also reported a decline in March output, which fell 5.3 percent year-on-year.
With recent business confidence and purchasing managers' surveys showing tentative signs of improvement, Monday's data complicates the picture for gross domestic product and eurozone industrial output figures out this week.
"The improvement we've seen in the business surveys has not yet translated into hard data and I think we couldn't really have expected it to do so that quickly," said Laurent Bilke, chief European economist at Nomura in London. "It's more a story for the middle or the end of the second quarter than for the month of March which is definitely too early to see," he said.
"UNDOUBTEDLY BAD"
The euro zone's three biggest economies will weigh heavily on industrial production figures for the whole of the 16-nation bloc due on Wednesday, when economists are expecting a 1.0 percent monthly fall and an 18 percent annual drop.
Monday's weaker output figures will also reinforce expectations for a sharper contraction in gross domestic product during the first quarter with the economy firmly stuck in the worst recession since World War Two.
Germany, France, Italy and the eurozone as a whole all report GDP figures on Friday and French Economy Minister Christine Lagarde said in a newspaper interview on Monday that France's numbers would be "undoubtedly bad".
"Euro-zone industrial production probably undershot expectations in March," analysts from Capital Economics wrote in a research note following the French and Italian data.
"In turn, this suggests that risks to the first quarter euro-zone GDP figures, which are out later this week, are skewed to the downside relative to the median forecast of 2.0 percent." (For a story looking ahead to the eurozone GDP data, please double click on.
Both the production and GDP data are backward-looking indicators and improved survey data has fed hopes that the worst of the crisis may have passed, but Monday's data underlined warnings against too much optimism.
"It is falling less quickly, but we are still in that context, and that will force everyone to confront a reality which is a bit less rosy than what the markets have incorporated rather quickly," Olivier Gasnier, an economist at Societe General in Paris said of the French output data. (Additional reporting by Daniel Flynn in Rome; Editing by Toby Chopra)