Jan. 2 (Bloomberg) -- European manufacturing contracted in December by more than initially estimated and at its fastest pace on record, signaling the recession is deepening.

A measure of manufacturing fell to 33.9 last month from 35.6 in November, Reuters reported, citing an index compiled for it by Markit Economics and based on a survey of purchasing managers. That was lower than a Dec. 16 calculation of 34.5 and the weakest since the report was introduced a decade ago. A reading below 50 indicates contraction.

Slumping production at the euro-area’s factories adds to pressure on the European Central Bank to cut interest rates further this year with investors betting it will do so as early as this month. The euro fell the most in two weeks against the dollar today on prospects the ECB will reduce rates to support the economy amid its first recession in 15 years.

“All lights are on green for the ECB to cut rates further” said Christoph Weil, an economist at Commerzbank AG in Frankfurt. “Pressure on the ECB is high with the economy tumbling and prices retreating.”

Manufacturing shrank for the seventh consecutive month as businesses feel the pain of tighter bank lending, the euro’s rise to a record against the pound and weaker demand at home and abroad even after the price of oil fell more than 70 percent from a July peak of $147 a barrel.

Largest Economies

Industry contracted throughout the euro-area’s largest economies. An index for Germany fell to 32.7 from an initial estimate of 33.5 and the gauge for France dropped to 34.9 from 35.9. A measure for Italy rose to 35.5 from 34.9 in November.

The outlook for new orders in the whole region dropped to 26.4 in December from November’s 28.8 and the original calculation of 27.4, Reuters said.

“European manufacturers will continue to find life very difficult over the coming months,” said Howard Archer, chief European economist at IHS Global Insight in London.

Alcatel-Lucent SA, the world’s largest maker of fixed- line networks, said Dec. 12 it will cut costs by 1 billion euros ($1.3 billion) in each of the next two years, including the elimination of 1,000 more managerial jobs, as it tries to curtail losses.

‘Global Recession’

Businesses are also suffering elsewhere, reports showed today. Manufacturing declined in China for a fifth month in December, for a seventh month in Australia and at its fastest pace in at least 14 years in Sweden.

Such data are “consistent with the deepest global recession since at least the early 1980s,” said Lena Komileva, head of market economics in London at Tullett Prebon Plc.

Investors are predicting slumping European growth will force the ECB to lower rates by at least 25 basis points when its governing council convenes Jan. 15, Eonia forward contracts show. Retail sales fell for a seventh successive month in December and lending to the private sector stagnated, reports showed this week.

The bank has already cut its key rate by 175 basis points to 2.5 percent since early October to revive the economy and protect it from the financial crisis.

Trichet Comments

Recent comments from ECB officials such as President Jean-Claude Trichet suggest the bank may pause in January after its unprecedented 75-basis-point rate cut on Dec. 4.

Trichet told Boesen-Zeitung in an interview published Dec. 31 that the recent rate cuts are “far from having been fully transmitted to the economy.” Governing Council member Ewald Nowotny said in an interview broadcast today on Austrian radio station ORF that “it takes time” for the bank’s efforts to ease bank lending to have an effect.

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net

Last Updated: January 2, 2009 04:31 EST