Spain's manufacturing sector continued to contract in August as a recession weighed on production, but the downturn did at least decelerate helped by a softer fall in export orders, a survey showed today.

The Purchasing Managers' Index for the manufacturing sector was 44.0 in August, up from 42.3 in July, and beating analysts' estimations for a reading of 42.6.

But the index was still well below the 50 mark that divides growth from contraction, suggesting a long way to go before the sector could contemplate exiting a recession that is expected to drag through this year and next as austerity measures stamp out growth.

The index was at least helped by a notable slowdown in the pace of contraction in exports.

The new export order index was 48.2 in August, up from 44.2 in July.

"The data again make grim reading as business conditions in the sector continued to deteriorate at a marked rate. As the current downturn drags on into a sixteenth month, there seems little prospect of any improvement before the end of the year," said Andrew Harker, economist at data provider Markit.

Spain entered a recession at the end of last year, and the government expects the economy to contract this year and next as austerity measures aimed at cutting a public deficit weigh on economic output.

The data also showed the industrial output index holding close to the 40 mark as factories slow production with orders low.

In light of the small number of orders being taken, firms continued to cut jobs.

The country suffers the highest unemployment rate in the European Union at just under 25 per cent.

Adding to factory woes, input prices picked rose for the first time since May. By contrast prices charged for goods continued to slide, indicating scant demand for products as firms slash prices to drum up any interest.

Markit reported anecdotal evidence of firms' paying higher costs for raw materials.

That chimed with official data on Thursday which showed a sharp acceleration in inflation, which the statistics institute said was a result of rising fuel costs.

Bloomberg