Data from the US commerce department also showed corporate profits falling 1.2 per cent during the quarter.
The drop was the fifth straight quarterly decline and even worse than the 0.9 per cent decline estimated a month ago.
At the same time data on US retail sales showed shoppers spending significantly less in the run-up to the Christmas holiday period than they did a year ago.
The news brought more gloom to Wall Street, where the Dow Jones industrial average fell 1.18 per cent.
That gloom spread to Asia on Wednesday with Tokyo's Nikkei share index down by 2.69 per cent in morning trade.
Economists meanwhile are bracing for a steeper fall in US GDP of around six per cent in the current quarter, with further declines in the next six months before a lukewarm recovery takes hold, possibly in later 2009.
"It will get a lot worse before it gets better," said Nariman Behravesh, chief economist at Massachusetts-based forecasting firm IHS Global Insight.
"We are in the midst of the worst recession in the post-war period, even factoring in a massive stimulus program."
With credit markets locked despite a $700 billion financial rescue package and billions of dollars in loans from the Federal Reserve, analysts see little likelihood of a quick turnaround in the housing market or the overall economy.
Worse to come
Commenting on the latest GCP figures the Bush administration warned that the country should be prepared for worse news to come.
|The impact of the US recession is spreading around the world [AFP]
"The fourth quarter, because of the credit crisis, the standstill in credit as markets froze up and the financial market turmoil, will be significantly weaker," Tony Fratto, a presidential spokesman, told reporters at the White House.
The US is already locked in its longest recession in a quarter of a century, with the impact of the downturn spreading around the world.
The incoming administration of Barack Obama, the US president-elect, is racing to put together a stimulus package that could reach some $850 billion to be enacted in January, days after the new president takes office.
The plan is expected to include spending on infrastructure such as roads and bridges, aid to states, work to modernise schools and energy projects.
On Tuesday Joe Biden, Obama's vice president-elect, told a meeting of economic advisors that as the economy worsens, the need for a bold plan "grows every day."
Nonetheless economists said that even if the Obama administration was to achieve its goal of enacting the stimulus package in January, it would still not arrive soon enough to keep the economy from enduring a severe downturn well into next year.