Britain's factories are heading deeper into recession
This means factory output is now nearly 4% lower than a year ago, confirming that the sector is heading even deeper in recession.
Meanwhile, a leading business survey has shown a slump in the services sector.
The survey from the Chartered Institute of Purchasing and Supply (CIPS) shows that in October the output of service industries shrank for the second month in a row, with business activity at its lowest for more than five years.
'Terrible' figures
The September figure for industrial production was below analysts' expectations and reversed a 1.2% increase in August caused by a one-off boost in car production.
Manufacture of computers and mobile phones saw further big falls in September, according to the ONS survey.
"I think the survey does confirm that the manufacturing recession is increasingly affecting the still-buoyant services sector," he said.
"We can expect the rate of growth of the official measure of service sector output show considerable weakness in the fourth quarter and the first quarter.
Mr Iley added that the industrial production figures appeared "absolutely terrible."
"The high-tech areas of manufacturing are continuing to fall back very sharply," he said.
"It is an unremittingly bleak picture for the manufacturing sector with the world economy slowing, firms still struggling with a lack of competitiveness from the strong pound and recession will continue in the manufacturing sector for some months yet."
Falling inflation left the Bank of England with "room to manoeuvre" on interest rates, he added, and he predicted two further cuts before the end of the year.
'Stiff competition'
David Rich-Jones, of CIPS, said: "What is significant that the index has dropped for the past two months, this time by nearly two points.
"That means that over the past two months, the level of business activity has fallen by over five points and that is very significant."
He said the decline had mainly come in the airline, hotel and restaurant businesses.
"The outlook (for employment) is not very positive and this is the first time we have actually seen it fall.
"The competition is very stiff out there.
"Purchasing managers across the country are fighting very hard to stave off recession."
Tough retail conditions
The gloomy news was compounded by a survey from market research firm Verdict which said UK retail faced its toughest ever year.
Retail sales will grow by just 2.3% in 2002, less than half the 5.7% annual growth rate recorded so far this year, Verdict said.
The report said house values, housing transactions and job security, the three factors underpinning consumer credit spending, were all showing signs of significant deterioration.
Verdict said the big winners over the all-important Christmas period would be consumer electronics retailers, such as Dixons and Kingfisher.