WASHINGTON (REUTERS) - U.S. manufacturing output contracted more than expected in August, dragged down by a sharp fall in auto production that could moderate economic growth in the third quarter.

American factories churned out 0.5 per cent fewer goods last month, the Federal Reserve said on Tuesday.

Some slowdown was anticipated after an earlier survey of factory manager sentiment pointed to a sharp brake in activity. Analysts polled by Reuters had expected a 0.3 per cent decline in factory output.

The drop, combined with a fall in mining production and higher output for utilities, left overall industrial output 0.4 per cent lower during the month.

Auto and autopart production contracted 6.4 per cent, reversing much of the strong gains registered in July. Some of the slowdown in factory production could be due to a stronger dollar that is crimping exports, although sturdy domestic auto sales have given more reassuring signs for the economic outlook.

Capacity utilization in the factory sector fell to 77.6 per cent last month from 78.0 per cent.