The latest gloomy figures represent a further downward revision of three percentage points on AWI's September 2006 forecast, as parched conditions increasingly ravage the country's farming sector.

AWI forecaster David James said while volumes had been positive for the first five months of the year to June 2007, wool production was set to "diminish significantly" in the next six months, when the full effects of the drought would be felt.

The estimates were particularly bad because for the first time in at least a decade, drought conditions had spread to nearly all of the country's main wool producing areas, he said.

"Unlike the 2002 drought, which was largely across the eastern seaboard, the current drought is Australia-wide."

The drought has forced many farmers to sell off their stock for slaughter to make ends meet amid skyrocketing feed costs.

Western Australian graziers have been hardest hit, with wool production down 15 percent, and output in New South Wales, which accounts for more than a quarter of the country's production, was expected to fall by 10 percent.

Traditional wool yields of more than 70 percent have plummeted to around 50 percent, with sheep producing finer and shorter strands of wool.

Treasurer Peter Costello has predicted the drought will cut farm production by 20 percent, push the rural economy into a "depression" and shave 0.50 percentage points off overall economic growth.

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