Production in Australia's manufacturing sector shrank in September at the sharpest pace in nearly two years amid a renewed fall in new orders, as both business and supply conditions deteriorated.

The headline seasonally adjusted S&P Global Australia Manufacturing Purchasing Managers' Index fell to 49.6 in September from 52 in August, slipping below the 50 mark that separates growth from contraction, the index provider said Thursday.

The reading signals a marginal decline that was, nevertheless, the steepest in 21 months and represents the second consecutive month in which output fell.

"Central to the latest downturn was a fresh decline in new orders for goods, which indicated that demand has yet to stabilize after improving in the earlier two months of the quarter," said Jingyi Pan, economics associate director at S&P Global Market Intelligence.

The sector recorded its first fall in total new sales in three months, driven by fierce competition, rising prices, and a worsening in underlying demand. New orders from abroad also contracted after posting gains in August, prompting Australian manufacturers to scale back production.

S&P Global also pointed to ongoing spare capacity in manufacturing as the volume of backlogged orders continued to trend downwards. Goods producers reacted to the declines in new work and production by resuming job shedding and curtailing their purchasing activity at the sharpest rate in four months.

Additionally, as the Middle East conflict continued to interfere with international shipments, supplier delivery times extended further at the end of the third quarter. Surveyed firms also reported delays due to severe weather disruptions in North Asia, which contributed to higher input prices in September, especially for raw materials and oil.

While the degree of confidence among Australian manufacturers slid to a four-month low amid relatively challenging conditions, firms remain optimistic that business development plans and product launches will boost sales over the coming year.