South Korea's gross domestic product (GDP), the broadest measure of economic performance, shrank 4.3 percent from a year earlier, the Bank of Korea (BOK) said.
This is the largest shrink since the last quarter of 1998, when the growth fell 0.6 percent.
However, the economy expanded 0.1 percent in the first quarter from three months earlier as a sharp decline in exports moderated, the central bank said Friday.
The quarterly growth rate was revised down from a 0.2 percent expansion prediction made by the BOK in early April. But it contrasts with a 5.1 percent fall in the fourth quarter. From a year earlier, the economy declined 3.4 percent in the October-December period.
The quarterly growth rate beat expectations as the South Korean economy had widely been expected to slip into a recession, or two straight quarters of negative growth.
"Private spending and construction investment swung to gains and a decline in exports slowed down in the first quarter," the BOK said in a statement.
Exports of goods, which account for about 60 percent of South Korea's GDP, fell 3.4 percent on-quarter in the three months ended March 31 after declining 12.6 percent in the fourth quarter.
Private spending, one of the main growth engines of the Korean economy, gained 0.4 percent, compared with a 4.6 percent contraction in the preceding quarter.
Facility investment shed 9.6 percent, after falling 14.2 percent three months earlier, and construction investment rose 5.3 percent, compared with a 3 percent decline in the final quarter of last year.
The data comes as some budding signs of economic improvement have increased, raising prospects that a sharp fall in the Korean economy has eased. Industrial output saw its decline moderate in February and South Korea's trade surplus reached a record US$4.6 billion in March.
But Finance Minister Yoon Jeung-hyun remained cautious, saying that it is too early to be optimistic about an economic recovery as negative factors coexist alongside positive ones. The country's jobless rate rose to 4 percent in March and 195,000 jobs were eliminated from payrolls, the highest since the Asian financial meltdown.
The BOK predicted that the local economy will shrink 2.4 percent this year, the worst performance in more than a decade. The economy may hit bottom in the second or third quarter, but it is expected to recover very slowly due to uncertainty about the global recession, it added.
The International Monetary Fund on Wednesday downgraded its 2010 growth forecast for the Korean economy to 1.5 percent from an earlier prediction of 4.2 percent.
The government and the BOK have made efforts to bolster the slumping economy by unveiling a string of economic stimulus packages and cutting the key interest rate. In March, the government unveiled a record 28.9 trillion won (US$21.5 billion) extra budget aimed at creating more jobs and boosting weakening domestic demand.
On April 9, th BOK froze its key rate at a record low of 2 percent for the second straight month, saying that a sharp fall in economic activity has moderated. It had made six consecutive rate cuts totaling 3.25 percentage points into February.