Ireland's GDP contracted 1.2% in the second quarter and confounded analysts' expectations of 0.5% growth, according to an initial estimate released today.
The figure compares to GDP growth of 2.2% in the first quarter of this year, according to the Central Statistics Office.
Ireland also revised down its first quarter GDP growth figure from 2.7% to 2.2%.
Meanwhile GNP, gross national product, which adjusts GDP for income flows between residents and non-residents, fell 0.3%.
Consumer spending was 1.7% lower in volume terms compared to the same period in 2009, while capital investment declined by 19.9%.
Net exports increased by €884m year on year, while industrial output rose 1.7%.
World first economist Jeremy Cook says the GDP figure is extremely worrying, especially combined with a rising default rate forecast for the country.
"When I saw the figure I honestly thought it was a misprint - it is just horrible," he says.
"Trading today had kicked off with rumours of Anglo Irish Bank defaulting on debt and has led to the Irish CDS, insurance against the Irish Government defaulting, move to a record 5%.
"To put that in context, the market believes Ireland is now twice as likely to default on its debt as Vietnam."
Earlier this week, a bond auction by the Irish Government successfully raised €1.5bn, pointing to a degree of investor confidence in the economy.
The Government's four-year bonds were oversubscribed around five times, while its eight-year bonds were three times oversubscribed.
The 2014 bonds were sold at an average yield of 4.76%, while the 2018 bonds' average yield was 6.02%.
Ireland has been plagued by rumours it will have to approach the International Monetary Fund or the European Union for financial assistance as it struggles to keep its banking sector afloat and deal with its budget deficit.
However, central bank governor Patrick Honohan dismissed the rumours as "alarmist" and insisted the Government is taking appropriate steps to address the deficit.
Analysts have suggested it could reach as high as 25% of GDP this year.
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