The US manufacturing sector shrank unexpectedly in June for the first time in nearly three years as new orders tumbled.
This is one of the starkest signs to date that the economic recovery is slowing.
The Institute for Supply Management said its index of national factory activity fell to 49.7 from 53.5 the month before, missing forecasts of 52.
It was the first time since July 2009 that the index has fallen below the 50 mark that separates expansion from contraction.
Manufacturing has been one of the stronger areas of the economic recovery, which appears to be losing momentum over fears about the euro zone debt crisis and uncertainty over domestic fiscal policy.
Analysts said the reading increased the odds the Federal Reserve will step in with a third round of bond buying - known as quantitative easing - to prop up the economy.
The forward-looking new orders component of the index dropped to its lowest level since April 2009 at 47.8 from 60.1. It was the largest monthly drop since October 2001, ISM said.
The employment gauge held up better, slipping to 56.6 from 56.9. Investors will get a broader look at the labor market with the US nonfarm payrolls report due on Friday.
The ISM report painted a more dour picture for manufacturing than a survey released earlier from Markit, which showed the sector still grew in June, albeit at its slowest rate in 18 months.
Until today's report US manufacturing had held up better than similar sectors in overseas economies, which have already shown signs of deteriorating. Euro zone manufacturing took another hit in June, data showed today, while China and Japan saw orders from abroad fall.
Separately, US construction spending rose to its highest level in nearly two and a half years in May as investment in residential and federal government projects gained.
Construction spending increased 0.9% to an annual rate of $830 billion, the highest level since December 2009, following an upwardly revised 0.6% rise in April.
