Industrial production in the 17 countries sharing the euro fell 0.3 percent in March from February, the EU's statistics office Eurostat said on Monday. Economists polled by Reuters had expected a 0.4 percent increase in the month.

The performance underlines the weak demand for goods such as machinery and consumer products, as the currency area suffers from the devastating impact of a two-year debt crisis that has driven unemployment to a record high.

On an annual basis, factory output dived 2.2 percent in March, the fourth consecutive monthly slide, Eurostat said, and only Germany, Slovenia and Slovakia were able to post growth in the month.

The picture was similar on a monthly basis, with foreign demand for German cars and high quality machinery driving production. But elsewhere, output fell 9 percent in the Netherlands, the biggest drop in the euro zone for the month.

Many economists expect Eurostat to show on Tuesday that the euro zone entered its second recession in just three years at the end of March, with households suffering the effects of austerity programs aimed at cutting debt and deficits.

European officials have repeatedly said the slump will be mild, with a recovery in the second half of this year. But the strong economic data seen in January has unexpectedly faded and business surveys point to a deeper downturn, with the drag coming from a debt-laden south, epitomized by Greece and Italy.

Economists polled by Reuters last week estimated the euro zone economy shrank 0.2 percent in the first quarter, after shrinking 0.3 percent in the fourth quarter of last year.

EU leaders will meet in Brussels on May 23 to try to map out ways the euro zone and the wider European Union can return to growth while still cutting debts and deficits, but economists and investors say there is little room to manoeuvre.

"In addition to 'high alert and forceful' crisis management, Europe still needs to articulate more clearly its longer-term game plan," Erik Nielsen, Unicredit's global chief economist, wrote in a note to clients on Sunday.

(Reporting By Robin Emmott; editing by Rex Merrifield)

• A Permanent Economic Emergency