The South Korean economy shrank 5.6 percent last quarter from three months earlier, the sharpest fall since the financial crisis a decade ago, due to faltering exports and sluggish domestic demand, Yonhap News reported quoting the central bank Thursday.

The country's gross domestic product (GDP) also contracted 3.4 percent from a year earlier, the Bank of Korea (BOK) said. The quarter-to-quarter performance contrasts with a 0.5 percent expansion in the third quarter.

It marked the worst drop since the first quarter of 1998 when the nation's GDP, the broadest measure of economic performance, fell 7.8 percent on a quarter-to-quarter basis in the aftermath of the Asian financial crisis.

The fourth-quarter decline was worse than a median 2.5 percent fall forecast in a survey of 11 analysts by Yonhap Infomax, the financial news arm of Yonhap News.

For the whole of 2008, the Korean economy grew 2.5 percent, down from a 5 percent expansion in 2007. The BOK predicts the local economy will likely grow just 2 percent this year.

"Slumping exports largely contributed to the fourth-quarter economic contraction. There is a high possibility that the 2009 economic growth will miss the BOK's earlier 2 percent estimate," Choi Chun-sin, director general of the BOK's economic statistics department, told a press conference.

His remarks come as Asia's fourth-largest economy is cooling more markedly than expected with exports, the mainstay of the nation's economic growth, showing signs of a sharp slowdown amid a global recession.

"The Korean economy contracted, hit by tumbling exports. The fallout from Lehman Brothers' failure seemed to heavily weigh on the real economy in the fourth quarter," said Jun Min-kyu, an economist at Korea Investment & Securities. "I think the BOK is expected to continue its monetary easing and may cut the key rate, probably to as low as 1.5 percent, until the first half.''

According to the central bank, exports of goods, which account for about 60 percent of South Korea's GDP, tumbled 11.9 percent in the three months ended Dec. 31 from a quarter earlier after declining 1.9 percent in the third quarter. The figure marked the biggest fall since the first quarter of 1979 when overseas shipments fell an identical 11.9 percent.

Private consumption, one of the main growth engines of the Korean economy, fell 4.8 percent in the fourth quarter, compared with a 0.1 percent gain in the preceding three months. It was the lowest level since the first quarter of 1998 when consumer spending dipped 14.6 percent.

Facility investment plunged 16.1 percent, the worst in nearly 11 years, after rising 2.1 percent three months earlier. Construction investment declined 4 percent after remaining flat in the third quarter.

Experts said the bleak growth readings are expected to prompt the BOK to continue its monetary easing next month to kickstart the sputtering economy.

In January, the BOK cut the benchmark seven-day repo rate by half a percentage point to a record low of 2.5 percent, the fifth reduction in three months. Since October, the bank has trimmed the rate by a combined 2.75 percentage points.

On Monday, President Lee Myung-bak replaced his finance minister and other key economic officials in an effort to better cope with the slumping economy and financial turbulence.