The Irish Republic's economy shrank in the second quarter from the previous three months, surprising analysts who had been expecting growth.
Gross domestic product (GDP) fell 1.2%, the Central Statistics Office said. It also revised down its measure of growth in the first quarter to 2.2% from 2.7%.
Gross national product (GNP), seen by some as a more accurate barometer of the economy, fell by 0.3%.
The government has been seeking to reassure investors about the economy.
There have been concerns in the markets about the health of the Irish economy and government finances because of continued problems in the banking sector.
"We must export our way out of our current difficulties, there is simply no other way”
Brian Lenihan Irish Finance Minister
Meanwhile the difference between yields on 10-year Irish government bonds and German bonds - considered the safest - rose to its highest level in more than 10 years.
Irish debt is trading 4.25 percentage points above equivalent German bonds. This spread reflects how much riskier markets perceive the Irish economy to be compared to Germany's.
Most economists had predicted the Irish economy to have grown by 0.5% in the second quarter.
"It's well below [the consensus forecast] and a disappointing figure clearly," said Dan McLaughlin, Bank of Ireland's chief economist.
"One could take some comfort from the fact that domestic demand is beginning to show some signs of life," he added.
"Probably people will now have to reassess their outlook for this year overall."
The Central Statistics Office said the economy had been hit by a fall in consumer spending - down 1.7% compared with the same period last year.
But exports showed strong growth, up 884m euros (£751m) on a year ago.
"The figures for exports are strong and I am encouraged by this - the necessary competitiveness improvements are working," Finance Minister Brian Lenihan said in a statement.
"We must export our way out of our current difficulties, there is simply no other way."
BBC News - Irish economy contracts by 1.2%
Gross domestic product (GDP) fell 1.2%, the Central Statistics Office said. It also revised down its measure of growth in the first quarter to 2.2% from 2.7%.
Gross national product (GNP), seen by some as a more accurate barometer of the economy, fell by 0.3%.
The government has been seeking to reassure investors about the economy.
There have been concerns in the markets about the health of the Irish economy and government finances because of continued problems in the banking sector.
"We must export our way out of our current difficulties, there is simply no other way”
Brian Lenihan Irish Finance Minister
Meanwhile the difference between yields on 10-year Irish government bonds and German bonds - considered the safest - rose to its highest level in more than 10 years.
Irish debt is trading 4.25 percentage points above equivalent German bonds. This spread reflects how much riskier markets perceive the Irish economy to be compared to Germany's.
Most economists had predicted the Irish economy to have grown by 0.5% in the second quarter.
"It's well below [the consensus forecast] and a disappointing figure clearly," said Dan McLaughlin, Bank of Ireland's chief economist.
"One could take some comfort from the fact that domestic demand is beginning to show some signs of life," he added.
"Probably people will now have to reassess their outlook for this year overall."
The Central Statistics Office said the economy had been hit by a fall in consumer spending - down 1.7% compared with the same period last year.
But exports showed strong growth, up 884m euros (£751m) on a year ago.
"The figures for exports are strong and I am encouraged by this - the necessary competitiveness improvements are working," Finance Minister Brian Lenihan said in a statement.
"We must export our way out of our current difficulties, there is simply no other way."
BBC News - Irish economy contracts by 1.2%