Irish gross domestic product (GDP) shrank by 1.6 percent in the three months to December, compared with upwardly-revised growth of 0.6 percent in the third quarter, the Central Statistics Office said in a statement.
Eurozone nation Ireland has been rocked by costly bank bailouts and a domestic property market meltdown, while taxation revenues were ravaged by a deep recession.
Meanwhile on Thursday, Portugal was plunged into crisis after its prime minister quit following a showdown with parliament over his new austerity plan, increasing the likelihood that Lisbon will seek a financial bailout.
The events threaten to derail a two-day European Union summit that gets underway on Thursday in Brussels and that had been expected to finalise the bloc's response to a year-long eurozone debt crisis.
"Very poor GDP data for Ireland, coming at the same time as the political crisis in Portugal, risks sparking increased concerns and tensions over the eurozone sovereign debt crisis as the key EU summit takes place," said IHS Global Insight economist Howard Archer.
"This puts pressure on the summit to come up with something decent -- and it already is clear that they are struggling," he added.
The debt-laden Irish economy, which was saved by a huge international bailout four months ago, contracted 1.0 percent overall in 2010, the CSO said.
The nation's economy stumbled in the fourth quarter on the back of weak consumer spending and a faltering construction sector, according to Dr Ronnie O'Toole, chief economist at National Irish Bank.
"Consumer spending weakened even further in the fourth quarter to the lowest level since the crisis began due to the dual impact of the adverse weather and the loss of confidence stemming from the debt crisis," O'Toole said.
"Construction activity continued to weaken, with the decline in commercial property activity leading the fall."
He added: "Exports dipped in the fourth quarter compared to the third quarter, though (they) remain far stronger than in 2009."
The Irish economy -- formerly known as the Celtic Tiger for its roaring growth in the late 1990s -- has now contracted for the last three years.
However, the statistics office added that the pace of economic decline in the crisis-hit eurozone nation appeared to be moderating.
Irish GDP shrank 3.5 percent in 2008 and by a record 7.6 percent in 2009.
"While 2010 is the third year of falling output the annual rate of decline in GDP ... has moderated compared with the 2008 and 2009 results," it said.
Ireland, slammed by the global financial crisis, became the second eurozone member after indebted Greece to seek an international bailout late last year.
The Irish government was forced to accept a humiliating 85-billion-euro ($115-billion) debt rescue package offered by the International Monetary Fund and the European Union.
Earlier this year, Brian Cowen's centrist Fianna Fail administration was ousted from power as voters vented their anger over the bailout.
Enda Kenny became Ireland's prime minister after a dramatic general election and heads a coalition government of his centre-right Fine Gael party and centre-left Labour.
Ireland was the first eurozone member nation to plunge into recession, in the first half of 2008. It pulled out of the downturn in the first quarter of last year but it has struggled ever since.