By Sarah Marsh
Markit's Purchasing Managers' Index (PMI) fell for a sixth consecutive month in October to hit 49.1 -- just above an initial estimate of 48.9 but below the key 50 line that divides growth from contraction.
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It was the first time activity had shrunk since September 2009 and it was the lowest PMI reading since July 2009.
"The latest survey is consistent with a rapid deceleration from the double-digit rates of growth seen earlier in the year," said Tim Moore, senior economist at Markit.
The sub-index for new orders fell to 45.1, showing the outlook is darkening for the German economy, which recovered from the financial crisis faster-than-expected and outperformed its peers over the past year.
The reading for export orders fell even further in a fresh sign that weakness in key markets abroad and uncertainty due to the euro zone debt crisis is hurting German trade.
"Manufacturers frequently cited the uncertain economic outlook as causing clients to delay spending decisions and reduce their inventories," Moore said.
Berlin last month nearly halved its forecast for 2012 growth to 1 percent due to weaker expectations for exports.
Recent data shows the pace of expansion is easing. Industry orders and output are slumping, and business sentiment slid for the fourth month in a row in October, dipping to its lowest level since mid-2010.
Some economists say Germany is teetering on the brink of recession due to the euro zone debt crisis, which is depressing confidence and starting to spill over into the real economy.
The PMI data showed backlogs of work shrank for the second month in a row, and new hiring eased.
A final reading of Markit's German composite output index -- a snapshot of the economy's health that combines the services and manufacturing sectors -- is due on Friday.(Editing by Susan Fenton)