Central Bank Governor John Hurley has described the extent of the productivity slowdown in the Irish economy during the first six months of 2005 as "surprising".
Mr Hurley said the slowdown was still being analysed by the bank but that a clearer picture would emerge over the rest of the year.
In an address to the Leinster Society of Chartered Accountants in Dublin, he warned that Ireland is now one of the higher-wage economies and that productivity improvements across all sectors will be essential if the State is to be competitive in the global economy.
Mr Hurley said the productivity levels - measured as GNP per worker - were now only slightly ahead of the EU average which means Ireland lags behind the United States and many of the higher productivity European economies.
This meant there was still plenty of scope for productivity improvements relative to these countries, he said.
Mr Hurley said: "The latest data produced by the CSO show that in the first half of this year, economy-wide productivity growth was negative."
"This partly reflects weaker productivity growth in manufacturing and also partly the changing composition of Irish output growth towards a higher concentration of output in services and construction — which are generally associated with quite low productivity."
"In order to remain competitive and move the economy up the value-added chain, it will be essential to increase further the amount of R&D carried out in this country and improve the innovative capacity of the economy."
Mr Hurley said European governments must speed up reforms to reverse a decline in productivity growth that has left it far behind the United States.
He said it was clear many goals set out in the so-called Lisbon Agenda, which aims to turn the European Union into the world's most competitive and knowledge-based economy, would be difficult to meet by a deadline of 2010.
"The failure to meet the Lisbon targets has been partly due to the weaker global economic environment during the first half of the decade but also partly due to a lack of urgency among member states in implementing the necessary reforms to improve the functioning of markets," he added.
"If the Lisbon Agenda is to get back on track and the EU is to realise its full growth potential, the pace of reform has to be stepped up at both European and national levels."