That was the economy's worst showing in a quarter-century and raised the prospect that the nation could suffer its worst year since 1946.
"Consumers are just hunkering down and saying 'game over,' and businesses in response are cutting back on investment and employment," said Brian Bethune, economist at IHS Global Insight. "It's a negative feedback loop."
Now in its second year, the recession is expected to stretch at least through the first six months of 2009, as shoppers slash spending in the shadow of hard times at home and aboard.
Companies, in turn, are being forced to cut jobs and production while resorting to other cost-saving measures to survive.
The Commerce Department's new report was also weaker than the 5.4 percent drop economists had expected.
The biggest culprit behind the record-breaking revision: Businesses actually cut inventories instead of building them as the government originally thought. That reduced
- rather than added to - economic activity.
In addition, consumers pulled back even more on their spending - which accounts for about 70 percent of national economic activity. U.S. exports suffered a bigger drop and businesses retrenched further.
Many economists lowered their forecast for this year's gross domestic product to show a deeper contraction of at least 2 percent. GDP, the value of all goods and services produced in the United States, is the best barometer of the country's economic health.
White House press secretary Robert Gibbs said the latest GDP figure "underscores the urgency with which the president feels we have to move to improve our economy."
The economy has not suffered a decline for a full year since 1991, and that was just by 0.2 percent.
If the new projections prove accurate, it would mark the worst annual showing since an 11 percent plunge in 1946.
"The slide in our economy is very severe and very broad across all industries and regions of the country," said Mark Zandi, chief economist at Moody's Economy.com. "It is about as dark an economic time that we've experienced since the 1930s."
Before Friday's report was released, many economists were projecting an annualized drop of 5 percent in the current January-March quarter.
Given the fourth quarter's showing and the dismal state of the jobs market, some economists believe a decline of closer to 6 percent in the current quarter is possible.
The nation's jobless rate is now at 7.6 percent, the highest in more than 16 years. The Federal Reserve expects the rate to climb to close to 9 percent this year, and probably will stay elevated into 2011.
California's unemployment rate jumped to 10.1 percent in January, the state's first double-digit jobless reading in a quarter-century. The jobless rate announced Friday by the state Employment Development Department is well above the national jobless rate, and represents an increase from the revised figure of 8.7 percent in December.