"The sharp volatilities and price falls in the financial markets during the quarter, continued credit stringency and high interest cost all severely hit domestic demand," a government spokesman said.

It was the third consecutive quarterly contraction for the economy, which has been battered by the financial crisis that has swept through Asia for more than a year.

The economy contracted by 2.7 per cent in the first quarter and by 5.2 per cent in the second.

"The performance of the year will be quite unsatisfactory," said government economist KY Tang. "This present economic adjustment is more difficult than the one we had during the first oil crisis (in 1975)."

Speaking for the government, he said more hard times were ahead, with no hope of an economic revival for the rest of this year,but he declined to comment on prospects for 1999.

Tang said the government predicted the economy would contract by 5.0 per cent for the year as a whole, compared with its previous 4.0 per cent forecast.

But he said an anticipated fourth quarter GDP fall would be limited by better sentiment and a lower base in 1997. The government forecast that CPI (A) inflation would grow 2.8 per cent in 1998, compared with earlier forecasts of 3.2 per cent.

Economists said the sharp third quarter fall was expected but the 7 per cent decline was at the high end of predictions this week.

"It came out pretty much in the ballpark of our expectations. We were looking at roughly 6.5 per cent, so it came out slightly worse than our expectation but within the ballpark," said Sun Bae Kim, an economist with Goldman Sachs.

He said the figure did not come as a huge surprise because a lot of the indicators such as consumption and retail sales had been performing weakly.

Kim said that while the economy itself may not havebottomed out, the worst in terms of quarterly contractions may be over.

But Andy Xie, an economist with Morgan Stanley Asia, said the third quarter was worse than expected.

"I had expected around 5.5 per cent, and now it turned out to be 7 per cent, much worse than originally anticipated," he said.

He attributed the GDP fall to deteriorating consumption, sharp plunges in property prices and the dramatic fall in local stock prices during August.