Cyprus's central bank has warned that the island's gross domestic product will shrink more than one per cent in 2009, a steeper decline than government estimates.

"The economic slump our country is facing this year is steeper than forecast," central bank governor Athanasios Orphanides told reporters. He said according to estimates "real GDP will register a decline of more than one per cent" for 2009 and will improve only "slightly" next year, probably continuing to contract.

Mr Orphanides said a contracting economy could only spell bad news for unemployment, with figures expected to rise next year.

He said only a curb on state spending and tighter fiscal discipline would help address a "critical situation" and prevent a budget deficit of six per cent GDP - double the EU ceiling.

In the three months to September, Cyprus's economy worsened for the third quarter in a row as gross domestic product shrank by 1.4 per cent from the quarter to June.

The economy shrank because of "very negative growth rates" in construction, hotels and restaurants as well as "negative performances" from manufacturing, trade and transport activities, the service said.

On the back of poor tourism revenue and a stagnant property market the government expects the economy to decline by an overall 0.5 per cent in 2009 - the first annual drop in three decades - but grow by the same margin in 2010.

The European Commission estimates that the island's tourism-driven economy will contract 0.7 per cent this year.

Cyprus's economy is struggling to weather a poor year for tourism - with receipts and arrivals down by more than 11 per cent - and a slump in foreign property investment.

Tourism and construction combined contribute around 30 per cent of GDP. Cyprus has technically been in recession since June, after second-quarter GDP slipped 0.8 per cent. That followed a 0.5 per cent drop in the first three months of the year.