The drop in economic activity was the first since the fourth quarter of 2007 and comes with the world's biggest economy roiled by a housing meltdown and credit crunch.
The decline, not as steep as the 0.5 percent drop expected by private economists, comes amid mounting expectations of a sharp falloff in the US economy amid the worst banking and financial crisis in decades.
The decrease in activity -- a sharp fall from the 2.8 percent growth rate of the second quarter -- reflected weaker consumer and business spending and housing activity, offset in part by rising exports and government spending, the Commerce Department reported.
Consumer spending, the main driver of economic activity, fell 3.1 percent in the quarter on a sharp 14 percent plunge in spending on so-called durable goods like cars and appliances expected to last three years or more.
In housing, which has seen a horrific meltdown after a long boom, investment fell 19.1 percent, a major drag on the economy.