WASHINGTON (Reuters) - U.S. industrial production fell more than expected in August, hurt in part by a sharp decline in utilities output, the Federal Reserve said on Thursday.

Industrial output fell 0.4 percent last month after a downwardly revised 0.6 percent increase in July. Last month, manufacturing output also declined 0.4 percent.

Economists polled by Reuters had forecast industrial production declining 0.3 percent last month.

The industrial sector measured by the U.S. central bank comprises manufacturing, mining, and electric and gas utilities.

It had recently picked up after declining for much of the last 18 months but continues to struggle to shake off the dampening effects of weak global demand, a strong dollar and low oil prices.

Last month, there were some positive signs for the hard-hit energy sector, with mining output rising 1.0 percent, it's fourth consecutive monthly increase. However, the index for utilities fell 1.4 percent.

Business equipment output also dropped 0.4 percent, with cutbacks of nearly 2 percent for industrial and other equipment, the Fed said.

With overall output decreasing, the percentage of industrial capacity in use fell 0.4 percentage points in August to 75.5 percent, from an unrevised 75.9 percent in July.

The Fed sees capacity use as a leading indicator in deciding how much further the economy can grow before sparking higher inflation.

(Reporting by Lindsay Dunsmuir; Editing by Paul Simao)