(Adds employers' forecasts, paragraphs 11-12)
By Gavin Jones and Valentina Za
ROME, Dec 10 (Reuters) - Italy's economy posted its sharpest contraction for a decade in the third quarter, data showed on Wednesday, and a steep drop in industrial output in October suggested the fourth quarter will be even weaker.
Statistics bureau ISTAT reported gross domestic product fell 0.5 percent in the third quarter, confirming a preliminary estimate and the second consecutive decline after a 0.4 percent fall between April and June.
The breakdown showed a sharp contraction in investments and exports, while consumer spending unexpectedly edged up.
The quarterly GDP drop was the steepest since the end of 1998, and analysts said things are going to get worse for an economy which went into recession in the spring and has been one of the most sluggish in Europe for over a decade.
GDP was down 0.9 percent from the same period of 2007.
"The weakness of investments and exports will continue but consumer spending is going to turn downwards, so I expect a fourth quarter weaker than the third," said Luigi Speranza of BNP Paribas.
That view was supported by industrial output data showing a 1.2 percent drop in October which followed a record 2.6 percent fall the month before. A Reuters' poll of analysts had projected a smaller fall of 0.8 percent.
ISTAT revised down September's reading from an originally reported 2.1 percent decline which it had already said was the steepest drop since December 1998.
"There is no improvement likely over the fourth quarter and we expect the contraction to speed up," said Chiara Corsa of Unicredit MIB.
On a work-day adjusted year-on-year basis, October's output drop of 6.9 percent was the largest since an identically sized decline in December 2001.
Italian employers' group Confindustria forecast output would fall 4.2 percent in the fourth quarter against the third, thanks partly to 1.8 percent contraction in November. Confindustria's forecasts are based on monthly surveys of its members.
Output fell 2.2 percent in the third quarter.
Italy's data mirrored a grim picture for the manufacturing sector around Europe, with car production particularly hard hit as the downturn in global demand becomes more entrenched.
Italian car production was down an annual 34.3 percent in October and down 13.5 percent over the first 10 months.
"This recession is becoming more and more acute," said Gulglielmo Epifani, the head of Italy's largest trade union confederation, the CGIL, which is holding a nationwide strike on Friday to protest against what it calls the government's inadequate response to the economic crisis.
Most independent forecasters see Italy's economy contracting by around 0.4 percent this year and by around one percent in 2009, which would mean two consecutive years of contraction for the first time since World War Two.