Despite the weak data, the Reserve Bank of India is still expected t o raise rates at its Friday policy review.

"We expect the RBI to persevere with a 25 bps hike on Friday though the trajectory thereafter will hinge on the inflation trend in the coming months," said Rashika Rao, an economist with Forecast Pte in Singapore.

Industrial output rose just 3.3 percent in July,, dragged down by a huge fall in capital goods production.

This was well below a median forecast of 6.2 percent in a Reuters poll, government data showed on Monday.

India's main stock index extended losses to more than 2 percent and the rupee weakened to its lowest in more than a year on Monday after the data was published.

The slowdown was driven by a drop in capital goods production from 38.2 percent growth last month to a 15.2 percent contraction this month and a smaller drop in manufacturing.

Some cautioned that such high volatility raised doubts about the reliability of the data.

"We think that this data cannot be a credible guide to RBI policy. Inflation will continue to hold the key for the September rate decision," said A. Prasanna, an economist with ICICI Securities Primary Dealership in Mumbai.

Manufacturing output, which constitutes about 76 percent of the industrial production index, rose an annual 2.3 percent, the federal statistics office said in a statement.

With headline inflation at 9.22 percent in July the RBI is expected to raise rates on Friday for the 12th time since March 2010. August inflation data will be released on Wednesday.

Euro zone debt woes and a weak outlook for the US economy have added to home-grown headaches for Indian policymakers.

Weakness in the west is taking a global toll on manufacturing. South Korea's manufacturing sector shrank in August for the first time in 10 months as new export orders decreased, while China's manufacturing contracted slightly for the second consecutive month.