The Fed said output of the nation's factories, mines and utilities fell a larger-than-expected 0.8 percent in August, while the percentage of companies' capacity in use fell to 76.2 percent, the lowest level since the February to December period in 1960. 

July's operating rate was revised slightly to 76.9 percent from 77.0 percent, while July output was unrevised at a 0.1 percent drop. 

In August, output in the manufacturing sector alone fell 1.0 percent after being flat in July, its 10th decline in the past 11 months. Mining output was also down while utilities' production showed a large gain. 

The figures were bleaker than analysts had been expecting. In a poll of economists by Reuters, the average forecast had called for a smaller 0.5 percent drop and capacity use to fall to 76.6 percent. 

As the U.S. economy has slowed, businesses have cut back sharply on investments in new equipment and plants -- something which has hurt the manufacturing sector particularly hard. 

In August, 141,000 factory workers lost their jobs, and manufacturing payrolls have shrunk by more than 1 million since the middle of last year. 

A drop in auto production in August, after a bounce upward in July, pulled the overall industrial production figure lower. Output excluding the automotive sector was down by only 0.6 percent. The Fed said auto plant production lines ran slower in August -- at an 11.74 million unit pace compared with July's 12.05 million rate. 

Production of business equipment slipped 1.6 percent and was almost 7 percent lower than a year ago, the Fed said. 

Mining production fell 0.4 percent in August while utilities' output surged 1.6 percent.