NEW YORK (CNN/Money) - Industrial production tumbled in March, the Federal Reserve said Tuesday, as the U.S.-led war with Iraq slowed economic activity in the United States more sharply than many analysts had expected.

Production fell 0.5 percent after falling a revised 0.1 percent in February, the central bank said. Capacity use -- the percentage of production capacity manufacturers actually use -- dropped to 74.8 percent from 75.6 percent in February.

Economists, on average, expected industrial production to fall 0.2 percent and capacity use to drop to 75.4 percent, according to a Reuters poll.

U.S. stock prices fell in early trading, while Treasury bond prices rose.

The manufacturing sector has been struggling to recover from a long decline that began even before the broader economic recession that started in March 2001.

After a rebound last year, recent measures of industrial output from national and regional purchasing managers have showed sluggish activity in February and March, while oil prices have risen, consumer confidence has fallen and the labor market has remained weak, hurt by worries about the war in Iraq.

The Fed said output of consumer goods fell 0.5 percent after dropping 0.3 percent in February. Leading the way was a 0.8-percent drop in durable goods, which itself was led by a 1.3-percent drop in motor vehicle production, as automakers have been stung by lower sales in February and March.

Consumer energy output fell 2.9 percent, partially reflecting a drop in oil prices as the war with Iraq did little to disrupt world crude supply.

Output of business equipment dropped 0.2 percent after falling 0.3 percent in February.

The index for defense and space equipment moved up again in March and has risen 4.7 percent in the past twelve months.