The government said Tuesday for a third month that the economy is "deteriorating" after an indicator of current conditions suffered its biggest ever fall.

The coincident index slid to 100.7 in August from 103.5 in July, the Cabinet Office said. The 2.8 point drop was the biggest since the gauge was first compiled in 1980.

The word "deterioration" signals "the chance of a recession is high," the government said, acknowledging Japan may have slipped into its the first downturn in six years.

Crude oil's 38 percent decline since reaching a record in July probably won't be enough to spur the economy as the U.S. financial crisis saps growth in export markets.

"We think the economy has entered a recessionary phase" since the first quarter, said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. "The recent pullback in energy prices is a positive development, but we see increasing downside risks to our scenario, given feedback from the financial markets to the real economy."

The three-month moving average of the index, which the government uses to make its monthly assessment, fell to 102.2 in August from 103.2 in July.

Major manufacturers turned pessimistic for the first time since 2003 and factory output fell at the fastest pace in at least five years in August, reports showed in the past month.