The UK economy shrank by 0.3% in the last three months of 2012, further fuelling fears that the economy could re-enter recession.
The Office for National Statistics (ONS) said the fall in output was largely due to a drop in mining and quarrying, after maintenance delays at the UK's largest North Sea oil field.
The economy had grown by 0.9% in the previous quarter, boosted by the London 2012 Olympic Games.
For the whole year, growth was flat.
The ONS said that the "bumpy economy" was on a "sluggish trend".
Manufacturing fell by 1.5% in the fourth quarter, the services sector was flat, but construction output rose by 0.3%.
f the economy were to also shrink in the first three months of 2013, then the UK would re-enter recession, defined as two consecutive quarters of contraction.
The government's economic policies came under focus on Thursday when the chief economist at the International Monetary Fund (IMF) said that the chancellor should consider slowing down austerity measures in his March budget, because of their effect on growth.
"We think this would be a good time to take stock," Olivier Blanchard told BBC Radio 4's Today programme.
But Mr Osborne later rebuffed Mr Blanchard's advice. Speaking at the World Economic Forum in Davos, he said that spending cuts must continue if the government is to retain its credibility.
"We have a credible and flexible debt reduction plan. That credibility is very hard won and easily lost," he said.
However, Deputy Prime Minister Nick Clegg has said that the coalition made a mistake in cutting back capital spending when it came to office.
He told The House magazine that ministers had reassured themselves at the time that the reduction was in line with plans drawn up by Labour.
But they now realised investment in infrastructure was crucial for economic recovery, he added.