Business sentiment among large manufacturers fell for the third consecutive quarter amid increased fears of a global economic downturn, according to a key economic survey released Monday by the Bank of Japan.

Excessive inventory and slumping exports affected some of the nation's strongest companies, causing the diffusion index measuring corporate sentiment among major manufacturers to drop to minus 33, according to the "tankan" quarterly survey.

This marked a fall of 17 points from the previous quarter, the largest drop since March 1998. The diffusion index shows the percentage of companies that say business conditions are favorable minus those that feel conditions are poor.

"Sentiment is worsening in almost all industries," said Hideki Matsumura, senior economist at the Japan Research Institute. "Last quarter, manufacturers pinned their hopes on a U.S. economic recovery by the end of the fiscal year . . . now they are scrambling to adjust."

The survey results show large manufacturers projecting slightly better days ahead. But taking these expectations at face value would be too optimistic, economists say. Businesses are still trying to gauge the full extent of damage that the Sept. 11 terrorist attacks will have on Americans' consumer confidence.

"Prospects in the global economy are extremely uncertain. It is hard to see where Japan's economy will bottom out," Matsumura said.

The gloomy figures come as global market players try to gauge Prime Minister Junichiro Koizumi's will to push through with the promised structural reforms that economists say will initially result in increased bankruptcies and higher unemployment.

Monday's results show that negative sentiment spread to other industries besides those related to information technology -- the industry hit hardest by the abrupt U.S. economic slowdown this year.

The DI among large manufacturers of electrical machinery fell for the fourth consecutive quarter, dropping 25 points to minus 60; that's the darkest sentiment since May 1975.

Other industries also took spills. The DI for large producers in the iron and steel industry plunged 43 points to minus 75 -- the lowest since March 1999.

Meanwhile, for the first time since March 2000, the majority of large auto parts makers said business was poor, resulting in a DI of minus 2.

The auto industry -- considered relatively strong -- projected that business conditions will deteriorate further still, with the DI reflecting its outlook for the next quarter registering a minus 14.

The same dismal showing could be seen among large nonmanufacturers and small to medium-size companies.

Throughout, more firms reported poor business conditions, while the percentage of those that said business was either "good" or "not so good" (both positive values) fell.

A sense of sluggish demand persisted for the fourth consecutive quarter for large and small manufacturers, while both were hit by a sense of excessive inventories and falling prices.

The index for small and midsize manufacturers fell to minus 47 from minus 37, in its third consecutive fall to the lowest level since March 1999. For small and midsize nonmanufacturers, the DI fell to minus 37 from minus 31.

Both sectors said they expected conditions to deteriorate further.

"The awareness of price falls is extremely acute, reflecting a general deterioration in global markets . . . Meanwhile, companies predict it will be more difficult to secure funding," said Yasunari Ueno, chief market economist of Mizuho Securities Co..

For the fourth straight quarter, more manufacturers said marketing prices had fallen, while the diffusion index reflecting ease in obtaining financing worsened for both large and small firms to levels last seen in December 1999.

"This could potentially add ammunition to those arguing that the BOJ should adopt inflation targeting . . . or that it should more actively support the Resolution and Collection Corp.'s capacity (to purchase banks' bad loans)," he said.

Large and small to medium-size companies reported excessive numbers of employees, suggesting more layoffs lie ahead.

The survey was conducted between Aug. 29 and Sept. 28 on 8,749 companies nationwide, of which 96.4 percent responded.

Although more than 70 percent of responses were collected after the terrorist attacks, it is unclear whether and how the attacks affected the survey results.