The Australian economy has shrunk for the first time in eight years with a 0.5 per cent negative growth rate in the last quarter of 2008, according to government data.
The figures come despite government attempts to ward off the effects of the global economic crisis with two stimulus packages worth more than $32.5bn.
It also surprised economists who had expected the Australian Bureau of Statistics (ABS) to report a slight increase in the country's GDP.
Australia is not yet in a recession, which is defined as two quarters of negative
growth. The previous quarter registered very slight growth of 0.1 per cent.
For the year, the economy expanded 0.3 per cent, the ABS reported.
However, economists have said the slip into negative figures in the final three months of the year showed that Australia is at risk of going into a full-blown recession.
Following the announcement, the benchmark S&P/ASX 200 share index dropped 1.9 per cent with the Australian dollar also falling more than half a US cent to 63.28 US cents.
The growth figures come a day after the Reserve Bank of Australia kept interest rates unchanged, saying in a statement that the Australian economy was weak but "has not experienced the sort of large contraction seen elsewhere".
Resources boom slows
According to government figures, the deteriorating global financial conditions means the Australian government budget could fall into deficit of $14.4bn in 2008/09, or 1.9 per cent of GDP, and $22bn in deficit, or 2.9 per cent of GDP, the following year.
Australia has recently enjoyed a resources boom from exports of commodities like iron and copper ore to rapidly growing Asian economies such as China and India.
But the global financial crisis has caused demand to slide, and in December Australia saw its trade surplus shrink by 40 per cent
Economists are expecting to see a return to trade deficits as bulk commodity prices fall.
Australian officials meanwhile have said they expect unemployment to hit seven per cent by mid-2010, up from 5.75 per cent previously forecast in November.