That marks the third straight quarter of year-on-year shrinkage.

According to central bank figures South Korean manufacturing expanded 8.2 per cent in the second quarter while exports grew 14.7 per cent.

'Promising sign'

Demand for South Korea exports plunged as the global recession hit [EPA]
"The massive government support began to revive domestic demand and investment, a promising sign for a self-driven recovery," Park Jong-youn at Seoul-based Woori Investment & Securities told Reuters news agency.

"But the authorities would not want to exit from the emergency actions until they are confident about the recovery sustainability."

The latest data from South Korea follows improving economic figures from elsewhere in Asia with China and Singapore both reporting strong growth in the second quarter.

South Korea's economy narrowly avoided a formal recession registering 0.1 per cent growth in the first three months of the year.

That came after it suffered a 5.1 per cent contraction in the fourth quarter of 2008 - the worst performance since the Asian financial crisis in the late 1990s.

Earlier this month central bank analysts cautioned against overblown optimism, warning that the South Korean economy would likely lose some of steam in the second half of the year amid decreased government spending and flagging global demand.

South Korea's government has pumped about $50bn in fiscal spending and tax cuts into propping up the economy but has already spent 60 per cent of its budget for this year.

The Bank of Korea, meanwhile, has slashed its key interest rate to a record low 2 per cent, where it has stayed for five months.