THE MANUFACTURING sector contracted again last month, with activity in Irish factories dropping as a result of a sharp fall in new orders and the fastest clearing of backlogs in more than five years, new figures show.

The purchasing managers' index (PMI) published by NCB Stockbrokers is now at its lowest level since July 2003.

At a reading of 46.0, the index - which measures output, new orders, export orders, employment, stock levels and prices - is significantly below the 50 mark that separates growth from contraction.

NCB senior economist Eunan King said these were "not encouraging numbers" and were "possibly indicative of slowing activity in Europe".

Growth in euro zone manufacturing slowed down in March, but the sector is still expanding. Accelerating German factory output offset declining activity in Spain and Italy and sluggish growth in France.

Signs of slower growth in the euro zone as a whole, coupled with rocketing price pressures, will probably see the European Central Bank hold off on cutting interest rates for several months.

In the Republic, the reduced workloads prompted many manufacturers to cut back on staff in March, which was the fourth consecutive month of declining employment in the sector.

Higher raw material and oil costs also affected many firms, with these input price pressures underpinning inflation in the prices charged by manufacturers. But some firms offered discounts in a bid to drum up new business.