LONDON—Manufacturing activity in the euro zone contracted in October at its steepest rate since July 2009, adding to signs that growth in the region is grinding to a halt just a day before the European Central Bank decides whether or not to cut its key interest rate.
Germany, the driving force for manufacturing in the region, saw activity fall back into contraction for the first time since June 2009. Factories were less active than a month ago in all countries except Ireland.
Markit Economics said its purchasing managers index for the 17 nations that use the euro fell to 47.1 in October, from 48.5 in September.
The sub-50 reading means activity has now been shrinking for three months. A gauge of new orders also contracted, for the fifth month running, suggesting no recovery is in prospect for some time.
A renewed recession in the currency bloc is now almost certain, said Alan Clarke, economist at Scotia Capital.
"If there was any doubt that the euro zone was headed for recession, these data should confirm it," he said. While a third-quarter contraction is unlikely given the data already published for that period, a fall in output "seems nailed on for the fourth quarter."
Official data earlier this week showed that euro-zone unemployment in September rose to the highest level since records began in 1998, and quarterly growth in economic output slowed sharply in the second quarter to 0.2%, from 0.8% in the first quarter.
The ECB on Thursday will announce its latest decision on its benchmark rate, currently at 1.50%. But economists polled last week said they don't expect the rate-setting council to lower the rate just yet. Inflation in October held firm at 3.0%, significantly above the ECB's target of just below 2.0%.
A renewed economic downturn would compound euro-zone governments' problems as they seek to slash debt levels and end an increasingly complicated debt crisis that has forced them to bail out Greece, Portugal and Ireland.
Markit said Wednesday that factory activity in Germany fell back into contraction, with the PMI dropping to 49.1 from 50.3. But German manufacturers still fared better than those in neighboring countries.
Italian manufacturers reported a particularly steep fall in activity, with a reading of 43.3—a sharp drop from September's 48.3 and the country's weakest level since June 2009.
French factory activity shrank for a third-straight month, albeit at a slightly reduced pace, with a reading of 48.5 from 48.2 in September.
Separately, Germany's labor agency said the country's rate of unemployment inched up slightly in October, marking the first increase in more than two years. However, the overall number of jobless fell further below the closely watched three million mark.
The rate of unemployment increased to 7% in October, after seasonal adjustments. Economists had forecast a 6.9% rate. The unemployment rate was 6.9% in September.
German Economics Minister Philipp Roesler welcomed the "good news" about the job market but acknowledged signs of a slowdown.
"Progress in the labor market is admittedly slowing, and moderation in economic development is becoming noticeable," Mr. Roesler said in a statement.
Economists pointed to the increase as a sign that the euro zone's largest economy was proving susceptible to the broader economic slowdown infecting its neighbors.
"October's rise in German unemployment confirms that the euro zone's largest economy is experiencing an underlying economic downturn," said Jennifer McKeown, Senior European Economist at Capital Economics Ltd.
Ms. McKeown further warned of spillover effects into the broader economy, as rising unemployment coupled with high inflation curbed consumer spending among notoriously thrifty German consumers.
Consumer price inflation in Germany slowed slightly in October from a three-year high in September, but remains well over the European Central Bank's target of just below 2%, data showed last week.
The number of seasonally adjusted jobless increased by 10,000 during October, after a drop of 22,000 recorded a month earlier. The September jobless figure was revised from a preliminary drop of 26,000 reported at the end of September. Economists had forecast a drop of 10,000 for October.
The labor agency said the unexpected jump in the October jobless rate was skewed by the exceptionally positive jobless figure recorded in September.
"The condition of the labor market has all-in-all improved," the head of the labor agency Frank-Juergen Weise said in a statement in Nuremberg. He said demand for labor is "still high."
Total unemployment, unadjusted for seasonal effects, fell to 2.7 million in October, from 2.8 million a month earlier.
The unemployment figures compare to more upbeat data from Germany's industrial sector Wednesday.
New orders in September for Germany's plant and machinery industry rose 1% from a year earlier in real terms, the industry group VDMA said Wednesday. Domestic orders fell 2%, but foreign orders more than offset the dip with a 3% gain.
—Christine Popp in Nuremberg and Todd Buell and Margit Feher in Frankfurt contributed to this article.
Write to William Launder at william.launder@dowjones.com
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