The Nikkei/Markit purchasing manager's index (PMI) fell to 47.3 in July from 47.8 in June, staying stubbornly below the 50 level that separates contraction from expansion.
With conditions deteriorating, Indonesian factories shed jobs at the fatest pace since the survey began in 2011.
New orders from both domestic and export markets continued to decline in July with weak economic growth and falling customer confidence, the survey found, signalling a weak start to the third quarter.
Southeast Asia's largest economy grew 4.7 per cent in the first quarter - the slowest since 2009- and second-quarter growth is expected to be just as weak, Indonesia's central bank said. Indonesia is set to release second-quarter data on Wednesday.
However, costs and charges increased at weaker rates in July, giving room for the central bank to support growth. "Softer inflation rates combined with falling production provide the BI with scope for loosening policy in the coming months, with the next meeting scheduled for August 18th," said Pollyanna De Lima, an economist at Markit.
High inflation and the fragility of the rupiah currency has persuaded Bank Indonesia against lowering its policy interest rate further, after cutting it to 7.50 per cent in February.