The volume of construction work fell by 2.6 per cent, seasonally adjusted, in the June quarter, the Australian Bureau of Statistics (ABS) reported on Wednesday.
A surprise drop in engineering activity, which fell six per cent - its weakest reading since March 2001 - was the main source of the June quarter decline.
The ABS also sharply revised its figures for the March quarter to a five per cent increase in total construction work done, from its initial seasonally adjusted estimate of a 2.3 per cent rise.
JPMorgan chief economist Stephen Walters said the weaker-than-expected construction activity - the median market forecast was for a 1.5 per cent rise in the quarter - had "material implications" for next week's June quarter GDP data.
Walters said JPMorgan had forecast a sluggish 0.2 per cent rise in GDP in real terms in the June quarter, but was now looking at a flat result.
"The downside surprises on engineering and non-residential construction work mean the risk of a flat, or slightly negative, GDP print next Wednesday has risen," Walters said.
The ABS releases Australia's June quarter national accounts on Wednesday, September 3.
Before that, private capital expenditure figures for the June quarter are due on Thursday, while business inventories, company operating profits and the current account balance for the same period will be released on Monday.
Westpac senior economist Andrew Hanlan said construction represented 15 per cent of the overall economy and the contraction in the June quarter posed a "significant downside risk" to the bank's forecast of 0.5 per cent GDP growth.
But he said the data due over the next week would provided a clearer picture of the likely GDP outcome.
CommSec equities economist Savanth Sebastian said the data was in line with the recent deterioration in business sentiment, but there were no signs of a slowdown in the construction sector.
"Activity is at new highs as are order books," Sebastian said.
"Companies reliant on construction, including material suppliers, service businesses, developers and construction operators have plenty of work on hand - the challenge is to contain costs."
