The National Statistics Institute said output of hard winter wheat, used in bread, had fallen 95 percent from last year's harvest, to 9,000 tonnes.

Overall grain output was down 60 percent, "confirming the current grains season as the worst in recent decades", the agency said in its July agriculture forecast.

Joao Machado, head of the Farmers' Confederation of Portugal, called for more government assistance.

"This drought is so severe that it's going to affect all national production this year. We're going to see how it is already affecting next year's output through shortage of water," he told private TSF radio.

The southern coast's Algarve region, a playground for millions of tourists, has already cut water use by a fifth by shutting pools and letting city gardens and fountains go dry.

But Macario Correia, head of the regional metropolitan board, told TSF the area would face a water shortage next year if winter rains failed again.

"For next summer, the solution is to save water and obviously to hope that it rains. But hoping is not enough."

He said the area might need to turn to desalination plants and to piping water from distant reservoirs in coming years.

The whole Iberian nation of 10 million people is in severe or extreme drought, the Water Institute said in a routine report.

Thirsty eucalyptus trees, a source of pulp and paper, are expected to see growth slow by a quarter this year, a potential loss of 28 million euros ($34 million) for the industry, the institute said.

Forest fires have averaged more than 100 a day this year and burned about 134,500 hectares (337,000 acres) of woodland, more than in all of 2004, early forestry service estimates say.

Prime Minister Jose Socrates said his Socialist government would present a plan to combat fires after the summer, Lusa news agency reported.