WASHINGTON - MORE troubling US economic data surfaced on Thursday showing the banking and credit crisis has taken a sharp bite out of the manufacturing sector, increasing the risk of a deep and long downturn.

The Federal Reserve reported US industrial production plunged 2.8 per cent in September, the steepest decline since 1974.

A large portion of the decline was related to hurricanes Gustav and Ike in the US Gulf coast and a strike at aircraft maker Boeing, but analysts said the figures were nontheless grim for an economy already reeling from a housing meltdown and credit crunch.

Mr Smith said that despite the special factor such as hurricanes curbing energy production, 'these technical considerations merely added to widespread weakness in manufacturing that is consistent with recession-like behaviour'.

A separate report by the Philadelphia Federal Reserve on factory activity in the mid-Atlantic eastern region also showed extremely weak condtions. The index plunged 41 points - its biggest drop ever - to minus 37.5, the worst level since 1990.

Mr John Ryding at RDQ Economics said the horrific conditions in the manufacturing sector reflect the problems with credit, weak consumer spending and troubles in the global economy, which is no longer able to buy as many US-made goods.

The latest reports 'provide some degree of support to our skepticism of the Fed's claim that all of the decline in industrial activity in September was a result of the Boeing strike and the hurricanes,' Mr Ryding said.

'In our opinion, economic activity deteriorated sharply later in the third quarter and into the fourth quarter, probably reflecting tightening credit conditions and a significant slowing in global markets.'

The factory reports came a day after an unusually bleak report on US retail sales, which represents the bulk of US economic activity, which heightened anxiety about a consumer-led recession in the United States.

Most economists say the extraordinary efforts by Washington and other governments to stem the credit crisis appear to be helping confidence but will not prevent recession in the world's biggest economy.

'Recession is on its way,' said Mr Carl Weinberg, chief economist at High Frequency Economics.

'The seeds of recession germinated during the (credit) crisis and the likelihood is that most of the world - although not China - will be in recession long after the uncertainty about the world's banking sector has dissipated.'

Ms Sherry Cooper, chief economist at BMO Capital Markets said the upheaval in markets 'reflects the growing awareness that the US economy is going into a deeper and more protracted recession than expected'.

She added, 'It is no longer seen as a housing recession, but a full-blown consumer recession. The consumer has represented as much as 72 per cent of the US economy in recent years, so the deceleration in household spending has a profound impact on the overall economy.'

The news from the banking sector was hardly reassuring.

US bank giant Citigroup reported a third-quarter loss of US$2.8 billion (S$4.1 billion) on Thursday, its fourth straight quarter in the red, as it wrote off more losses linked to the real estate collapse.

Wall Street bank Merrill Lynch, which is being acquired by Bank of America, said its losses more than doubled in the third quarter, to US$5.2 billion, on writedowns of nearly US$10 billion.

The only mildly positive news came from data showing US consumer prices were flat in September. But analysts said this reflected the credit crisis and falling energy costs.

The Federal Reserve earlier this month cut its base rate a half-point to 1.5 per cent, reversing its posture leaning toward a rate hike to curb inflation earlier in the year.

Some say the Fed may have to cut rates further to jump-start a moribund economy that will push prices down further.

'The combination of rising unemployment, restrained household spending and weak industrial production are a toxic mix for inflation,' said Mr Joseph LaVorgna, economist at Deutsche Bank.

'As these conditions worsen in the coming months - as we believe they will - price pressures will face significant downdrafts.'