The economy contracted by 1.3 percent in the October-December period compared with the third quarter, or by 2.8 percent from the fourth quarter of 2010.
INE blamed the contraction in gross domestic product (GDP) "on a drop in internal demand which went from +0.9 percent in 2010 to -6.2 percent in 2011, associated mainly with a 3.6 percent reduction in household consumption."
Portugal agreed to implement a series of spending cuts and tax hikes in exchange for a 78-billion-euro ($102 billion) bailout package from the European Union and International Monetary Fund in May 2011.
The austerity measures are expected to lead to a 3.3 percent contraction in GDP this year and push unemployment up to a record 14.6 percent.