By Anooja Debnath
The final Markit Eurozone Manufacturing Purchasing Managers Index (PMI) for October, which gauges changes in activity levels across thousands of euro zone manufacturers, fell to 47. 1, revised down from a preliminary reading of 47.3 and down from 48.5 in September.
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This marks the third consecutive month the manufacturing PMI has been the 50 level that divides contraction from growth. Output and new orders indexes plunged to levels not seen since mid-2009.
The survey suggests the crisis is putting a chokehold on euro area business and, along with news that German unemployment unexpectedly rose for the first time in nearly two years to 7 percent, it adds pressure on the European Central Bank to cut interest rates.
The latest Reuters ECB poll from last week showed a rate cut was already on the cards by December and possibly as early as Thursday.
The survey's factory output measure plunged to 46.6 in October from 49.6.
"Output, new orders and new export orders all suffered their fastest declines since mid-2009, against a backdrop of weak domestic market conditions, the ongoing debt crisis and a darkening outlook for the global economy," said Rob Dobson, senior economist at Markit.
Broken down by country, in Germany, the economic engine of the euro zone economy, manufacturing activity contracted for the first time in just over two years.
But the euro rose 15 pips to $1.3780 after the German data were released, on slight relief the figures weren't worse.
Spanish factory activity shrank for a sixth straight month, while conditions in Italy, increasingly the focal point of worry in the still-raging euro zone debt crisis, deteriorated much more sharply than expected to a 28-month low.
The Italy manufacturing PMI fell 5 points to 43.3, the biggest one-month fall since the survey began in 1997, suggesting an economy deep in recession.
French manufacturing was also on the back foot in October, with new orders drying up and a fall in output.
Ireland was the only euro zone economy not to report a fall in factory activity.
For the euro zone as a whole, the new orders index fell for the fifth month running, plummeting to 43.4, the fastest rate of decline since May 2009. As a reliable forward-looking indicator, that bodes poorly for factory activity in November.
While firms hired more workers for the 18th consecutive month, hiring was the weakest since June 2010. Euro zone unemployment rose to 10.2 percent in September, nudged up by Spain, where unemployment reached 22.6 percent.
The euro zone debt crisis, which has persisted for more than two years, seemed a step closer to resolution last week when leaders struck a deal that involved Greek debt write-downs and boosting the size of the rescue fund to 1.0 trillion euros.
However, details of the plan remain unclear and progress was dealt a further blow on Monday when Greek Prime Minister George Papandreou shocked markets by calling a referendum on the latest bailout deal.
Papandreou won his cabinet's backing on Wednesday for that referendum, to be held by January, but may have a much tougher time convincing euro zone leaders, who meet along with the wider G20 in Cannes this week.
The latest PMI data also pointed to the first decline in input prices in just over two years. Euro zone inflation is currently running at 3.0 percent, well above the ECB's preferred 2.0 percent ceiling.
"The only possible bright spot was an easing in inflationary pressures, allowing manufacturers to hold fire on further selling price increases," said Dobson.
Manufacturing in the euro zone's key trading partners is also slowing, according to similar reports this week.
Factory growth in the United States, measured by the Institute for Supply Management (ISM) index, unexpectedly slowed in October, in line with similar trends in China, Britain and Canada, data showed on Tuesday.
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(Reporting by Anooja Debnath; Editing by Ross Finley/Toby Chopra)