JAKARTA (REUTERS) - Manufacturing activity contracted sharply in Indonesia in August and the workforce declined, according to HSBC Markit purchasing managers' index (PMI), which fell to a 15-month low.

Contraction in output, new orders and export orders pulled down the index for Southeast Asia's biggest economy to 48.5 from 50.7 in July. A survey reading above 50.0 signals expansion and a reading below that means contraction in manufacturing activity.

August saw "an overall deterioration in the Indonesian manufacturing sector," HSBC said.

"Weaker demand both domestically and externally appeared to be behind the worsening in manufacturing conditions," said Su Sian Lim, economist at HSBC.

"This is the fourth straight month of deterioration in the PMI, and marks the lowest print since May 2012."

New orders from goods-producing firms fell for the first time in 15 months while export orders declined for a third month in a row and at the fastest pace since February. One-quarter of manufacturers indicated lower export orders while 12 percent said they expanded, according to the survey.

For the first time in five months, firms reported a reduction in their workforce. The rate of job cuts was moderate, but still the strongest in the survey history, HSBC said.

The survey said firms paid higher prices in August for imported raw materials due to depreciation of the rupiah. The rate of inflation stayed strong but eased from July, it added.

"The rise in inflation - as reflected by higher input and output prices - will likely continue to curb domestic demand in the near-term. External demand, meanwhile, will likely only improve gradually," said Ms Lim.