Output in Germany's powerful industrial sector shrank in October after two months of solid gains, the government said yesterday, dampening hopes of an industry-led recovery in the economy, Europe's largest.

Output shrank by 1.8 per cent compared to the previous month, according to seasonally-adjusted preliminary figures published by the economy ministry, as the construction and energy sectors posted sharp losses.

The figures were much worse than economists had expected, with analysts surveyed by Dow Jones Newswires forecasting a gain of one per cent.

One bright spot in the data was an upwards revision of last month's output to 3.1 per cent. Preliminary figures had shown a gain of 2.7 per cent.

The data represent the second piece of bad news in as many days for the country's giant industrial sector.

On Monday, figures showed that industrial orders posted the first drop for eight months in October, falling by 2.1 per cent, also disappointing analysts who had forecast a rise.

Germany, one of the world's largest exporters, has been battered by the recession as demand for its goods has screeched to a halt amid slumping global demand.

This year, the government expects to suffer its worst downturn since World War II despite pumping in some €80 billion in stimulus packages to revive the ailing economy.

Chancellor Angela Merkel, re-elected in September, hopes that sweeping tax cuts will pep up the economy but her room for manoeuvre is constricted by a record mountain of debt.