Activity in the Australian manufacturing sector contracted in September due to the strong local dollar, increased raw material costs and weaker demand, a survey showed.

The Australian Industry Group-PricewaterhouseCoopers performance of manufacturing index (PMI) slumped 4.4 points to 47.3, taking it below the 50 mark that separates expansion from contraction for the first time this year.

The weak result was largely driven by "deepening declines" in activity in the food and beverages and fabricated metals sub-sectors as well as "sharp reversals" in the previously growing clothing and footwear and construction materials sub-sectors.

Production levels slid down 5.3 points to 46.2 to be below 50 for the first time since March and the new-orders sub-index shrank to 46.5 in September after eight months of growth.

Australian Industry (AI) Group chief executive Heather Ridout said the decline in manufacturing activity in September came after a six-month period of falling growth rates and a steady build-up of inventories.

"The strength of the Australian dollar in particular, led by the large rises in minerals prices, is challenging the competitive position of the sector in both the domestic and export markets," she said.

The Aussie jumped over 8 percent on the greenback in September to hit a two-year high, and climbed 5.6 percent in trade weighted terms.

The disappointing report, which comes after the release of figures indicating softness in the housing market, could make the Reserve Bank of Australia (RBA) think twice about lifting interest rates at its board meeting on Tuesday.

Ms Ridout said "Private sector demand is still not growing sufficiently to offset the unwinding of fiscal stimulus measures while wage pressures have built up steadily and are now at a level not seen for several years."

"This combination of factors underlines the vulnerability of manufacturers to interest rate rises."

Investors are split on whether the central bank will lift the 4.5 percent cash rate at its policy meeting next week, with one measure putting the chance of a hike at 52 percent.

With Reuters