The Purchasing Managers Index (PMI), a survey of 3,000 eurozone manufacturers compiled by research company Markit, fell to 44.0 points in July, down from 45.1 points in June. A score below 50 indicates a contraction.
The index has now fallen to a 37-month low with Markit warning that rates of manufacturing decline in Germany, France and Spain were "either at or close to the steepest since mid-2009."
Chris Williamson, chief economist at Markit, said: "The eurozone manufacturing sector's woes intensified again in July. Manufacturing therefore looks to be on course to act as a major drag on economic growth in the third quarter, as the euro zone faces a deepening slide back into recession."
Earlier data from Germany, Europe's largest economy, showed its manufacturing sector contracted at its fastest pace in three years last month and it was a similar story in neighbouring France.
Spain, which slid deeper into recession in the second quarter, saw the 15th straight month of contraction, while Italy chalked up a year in contractionary territory.
The PMI for Greece, where the debt crisis began, has been below 50 since September 2009. Ireland was the only country to show signs of emerging from the downturn, Markit said, where its PMI was above 50 for the fifth month.
"Rates of decline hit the fastest for three years or more in Germany and France, but Spain and Greece continue to stand out in seeing particularly disappointing performances," Mr Williamson said.
Factories across the eurozone cut prices at the fastest pace since early 2010, but the new orders index still fell to 42.8 from the previous month's 43.5 and has only been lower once in over three years. New export orders were at an eight-month low.
The output index sank to 43.4, the lowest since May 2009, under June's 44.7 and an earlier flash 43.6. Markit said it was in line with the official measure of production falling at a quarterly rate of over 1 percent.
"The current weakness of global economic growth suggests that all producers face a challenging environment in export markets as well as at home," Mr Williamson said.
After stagnating in the first quarter, narrowly avoiding a technical recession, a raft of gloomy data pushed economists in a Reuters poll last month to predict a contraction in the second and third quarters.
In a bid to spur growth the European Central Bank cut interest rates to a record low of 0.75pc in June and is expected to cut them again to 0.5pc before the year is out.
At its policy meeting on Thursday, it is expected to restart its dormant government bond buying programme with the aim of lowering Spanish and Italian government bond yields, which have reached levels unsustainable in the long-term.
The Telegraph
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