The Australian Industry (AI) Group-PricewaterhouseCoopers Australian performance of Manufacturing Index (PMI) rose 0.2 index points to 47.2 points in September.
Despite rising slightly on August's result, the figure stayed below the 50 point level that separates expansion from contraction in manufacturing activity.
"Driving this month's result, the lagged effects of higher official and commercial interest rates continue to squeeze consumer and housing-related demand," the survey said.
The report noted mining-related demand remained positive for manufacturing activity.
Weak domestic demand, global instability, the soft housing sector, increased raw material costs, loss of staff and competition from imports were cited as detrimental to activity.
Ai Group chief executive Heather Ridout said falling demand from local consumers and globally were hitting orders of Australian manufactures.
"The Australian PMI was stagnant in September, reflecting the softening of consumer demand in Australia and the weakness of the world economy, particularly in the United States, Europe, and our largest export market, Japan," she said.
"Signs of weaker growth in China are compounding the deterioration."
PricewaterhouseCoopers global leader of industrial manufacturing Graeme Billings said the ongoing uncertainty with the world economy would add to the strain domestic producers have with falling new orders and rising costs.
"These pressures on profitability are unlikely to ease over the next few quarters, notwithstanding some easing in the costs of fuel," he said.
Billings said firms had to keep costs under control, expand their global sources of materials and improve their staff skills.
Activity in manufacturing fell in all states except Western Australia, the report said.
New orders fell for the fifth consecutive month while manufacturing employment declined for the seventh month in a row.
Ridout said the ongoing fall in new orders indicated manufacturing would stay weak and jobs growth was likely to decrease.
"In these conditions a further reduction in official interest rates would be a welcome move by the Reserve Bank," she said.
The central bank cut the overnight cash rate by 25 basis points to seven per cent on September 2 in trying to stimulate the flagging economy.
Markets are pricing in a 50 basis points cut when the RBA board sits next Tuesday.
