* Economies contract in three out of five CEE states
* Euro zone crisis adds to domestic austerity
* Drought hurt Hungary, Romania in Q3
* Outlook remains poor
By Jan Lopatka
PRAGUE, Nov 15 (Reuters) - Central and eastern Europe mostly fell deeper into recession in the third quarter, hit by slowing demand for its exports and austerity programmes at home, with a broad economic upturn still a distant prospect.
A widespread drought, bouts of political instability and a slowdown in main export market Germany also weighed on Thursday's gross domestic product data from the region.
A slump in Hungary extended to nine months as GDP dipped 0.2 percent quarter-on-quarter, while the Czech Republic showed a worse-than-expected 0.3 percent decline, extending the economy's slide to a full year.
"It's pretty grim reading really... The main headwind is the problems in the euro zone which have weighed on trade, the banking systems and generally dragged on confidence, but there are local problems too," said Neil Shearing, EMEA economist at Capital Economics.
Central Europe depends heavily on exports to the euro zone and a slowdown there bodes ill for manufacturing, especially when paired with hurdles to domestic growth.
"If we don't have a really messy escalation of the euro zone crisis, the region will avoid the kind of epic falls that we saw in 2008-2009, but by the same token some countries will remain in recession and growth (elsewhere) will be pretty tepid," Shearing said.
With the exception of Slovakia whose booming car sector kept the country on a solid growth path, tax hikes and spending cuts have sapped domestic demand in the CEE region, with infrastructure investments falling along with welfare payments.
On the plus side, the region's poorest and least developed country Bulgaria eked out 0.1 percent growth.
Poland, the region's biggest economy, reports GDP numbers on Nov. 30 and analysts expect a slowdown in year-on-year growth to 1.8 percent.
Hungary and Romania - which reported a 0.5 percent quarterly GDP decline instead of 0.3 percent drop predicted by analysts - both suffered droughts, damaging their farm sectors after good harvests in 2011.
Romania fell into a double-dip recession at the end of last year and has been struggling to weather the impact of austerity measures taken under an aid deal with the International Monetary Fund.
A bitter political battle between the ruling leftist alliance of Prime Minister Victor Ponta and rival President Traian Basescu sent the leu currency to record lows and hit investor confidence, likely hurting third-quarter figures.
"In order to reign in budget spending, the government was forced to cut back on capital spending, with a negative implication for engineering works and the construction sector," said Mihai Patrulescu, senior economist at UniCredit in Bucharest.
"At the same time, poor crop yields ...took a toll on agricultural output."
The Czech Republic has seen its manufacturing shrink year-to date and export growth vanish, while the government has hiked taxes to rein in the budget.
"The (Czech) numbers are worse than expected and it is even more surprising when you look at data from Germany and France that came in slightly better than expected," said David Marek, chief economist at Patria Finance.
"Domestic demand is still in a slump, and net exports could not offset all the negative impact of the decline in domestic expenditures."
The Czech central bank has cut interest rates to 0.05 percent this month and went on a communication offensive to convince the public to spend more.
The government, squarely focused on fighting debt in the past two years, made a U-turn last week.
Centre-right Prime Minister Petr Necas said that cutting debt further below 3 percent of GDP was no longer a priority and the cabinet would seek ways to boost growth.
Slovakia showed a slowdown but remained one of Europe's brightest spots with 0.6 percent quarterly growth rate.
One of the newer euro zone states, it has benefited from a boom in the car industry, and new capacity there added to an over 60 percent year-on-year jump in output in the sector.