ROME--Italian industrial orders dropped in February, as both foreign and domestic demand slipped, underscoring the fragility of the economic recovery in the euro-zone's third-largest economy.

Industrial orders declined 3.1% from January, reversing much of their 4.8% increase in the previous month, national statistics institute Istat said Friday, using seasonally adjusted data. Orders are up 2.8% on the year in unadjusted terms, Istat added.

The monthly drop was led by a 4.4% reduction in foreign orders while domestic demand fell half as much.

Orders are a proxy for future industrial output, a key metric for Italy, which has Europe's second-largest manufacturing sector.

Industrial sales declined 1.5% in February from January in seasonally adjusted terms, with a 1.8% drop in the domestic market, the first decline in four months, Istat said. Industrial sales are up 1.2% from February 2013 in workday-adjusted terms, led by a resurgence in automobile production and sales, according to Istat.

Monthly orders and sales are volatile, but the latest figures highlight the risk of a downturn. While Italy's industrial output has an upward trend over the longer term, it posted a surprise decline of 0.5% in February from January, Istat reported earlier this month.

Still, business lobby Confindustria, which uses a proprietary survey, expects industrial output rose 0.7% in March, enough to post 0.5% growth in the quarter.

Italy's economy has to expand at around 2.0% in real terms for the unemployment to begin to decline to pre-crisis levels, economists say.

As exports are unlikely to produce such a result, Prime Minister Matteo Renzi's government has approved a new economic plan aiming to boost domestic demand. It is expected to approve EUR10 billion in tax cuts later Friday.

-Write to Christopher Emsden at chris.emsden@dowjones.com

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