"The economy contracted 0.16% compared to the previous year, the statistics agency said. Analyst were expecting slight growth.
The agency also cut its forecast for full year growth to 2.08% down from 3.03%.
Asian countries are reeling from a drop in demand from a key market, Europe.
China, another major trade partner for Taiwan, especially for many of its high-tech goods, has also seen its own economy slow in recent months.
"Given how weak Western markets remain, Beijing's loosening must start to lift mainland demand soon if Taiwan is to achieve a meaningful recovery in second half of 2012," said Donna Kwok from HSBC. "