REYKJAVIK, December 7, 2009 (AFP) - Iceland's recession deepened in the third quarter as the economy shrank by 5.7 percent from output in the previous quarter and by 7.2 percent on a 12-month basis, official data showed on Monday.

"Gross domestic product (GDP) in the third quarter of 2009 decreased from the preceding period by 5.7 percent in real, seasonally adjusted terms," Statistics Iceland said in a statement.

In the second quarter, the economy shrank by 2.0 percent from the first three months of the year.

In August, the country's central bank forecast a recession of 9.0 percent for this year, slightly better than initially expected. The economic slump is however expected to continue next year, with the economy forecast to contract by 2.0 percent.

Iceland's once-booming financial sector ground to a halt in October 2008 when the country's major banks collapsed after borrowing beyond their means to fund ambitious investments abroad -- their liabilities were once worth 11 times the island's total GDP.

The banks were nationalised but thousands of Icelanders saw their savings wiped out as unemployment soared and the Icelandic krona plunged in value.

After angry protests against the centre-right government's handling of the crisis, a new left-wing coalition won a snap general election in April 2009.

The new government formally applied for European Union membership at the end of July, eyeing the bloc as a safe haven in stormy times.