The national statistics office said the downward spiral accelerated in the second quarter as a barrage of wage and pension cuts plus tax rises sapped consumer demand.
A “significant” fall in consumption and lower investment saw the economy shrink 1.5 percent, it said, following a contraction of 0.8 percent in the first quarter to extend a recession that began in the middle of 2009.
The latest figures put the economy on track for a forecast contraction of 4.0 percent this year.
On a 12-month comparison, Greek output was down 3.5 percent in the second quarter after a fall of 2.3 percent in the first.
Worse still, and promising more pain to come, unemployment shot up to 12 percent in May from 8.5 percent a year earlier, with more than 600,000 people out of work, the statistics office said.
Athens agreed a 110-billion-euro (142-billion-dollar) rescue deal with the European Union and International Monetary Fund in May to cover its borrowing needs until 2012 as it was pushed to the brink of default.
The markets had turned against Greece whose public deficit and total debt had soared way past EU limits, pushing up its funding costs to unsustainable levels as the crisis appeared to threaten the whole eurozone project.
As part of the quid pro quo, Athens agreed to sweeping economic reforms and a draconian series of spending cuts and tax increases which sparked a series of protests across the country, including six general strikes.
Traders say a four-percent hike in sales tax between March and July, coupled with the highest inflation figures in 17 years, has had a disastrous effect on business.
“The government must urgently reconsider its tax policy,” the chairman of the Athens chamber of commerce and industry, Constantinos Michalos, told Mega television station.
A leading trader association this week reported that 17 percent of businesses in central Athens have shut down because of the crisis.
A fresh round of social unrest in expected later this year when the government attempts to implement additional reforms to boost competitiveness by lifting decade-old restrictions in a number of sectors.
As part of the EU-IMF accord, Greece must liberalise the energy sector which is currently dominated by state electricity operator PPC and overhaul the state railways organisation OSE which is 10 billion euros (12.8 billion dollars) in the red.
Both PPC and OSE unionists have pledged to fight back.
Prime Minister George Papandreou acknowledged this week that the measures which have dented his administration’s ratings are harrowing.
“The transition will not be easy but these changes are long overdue,” he told the Christian Science Monitor in an interview.
“There is, of course, pain … (but) the vast majority of Greeks recognise that such changes are necessary.”
Papandreou also said Athens intended to return to markets as early as next year if possible.
“We hope to return to the bond market next year. The specifics will depend on market conditions and domestic progress,” the prime minister said.
The Greek economy is expected to contract by four percent this year according to the European Union and the International Monetary Fund. Experts from the two bodies are closely monitoring the crisis recovery plan.
But Athens has made sufficient progress on its mandated reforms to be assured of its upcoming loan instalment in September, worth nine billion euros, a joint EU-IMF mission which audited Greek finances last week said.