Manufacturing, which accounts for the bulk of industrial production and contributes about 15 per cent to overall gross domestic product (GDP), fell 0.7 per cent in December.
Markets initially dipped after the data was announced, but edged up in afternoon trading. The sustained underperformance of the industrial sector may force the Reserve Bank of India to cut rates aggressively, some analysts said.
The Sensex has now for eight consecutive sessions, its longest losing stretch since May 2011, making a case for a much need rebound.
"5,900 is a critical level and there have been no put unwinding of 5,900... We are cautiously optimistic," K Subramanyam, AVP (institutional sales) at Asit C Mehta Investment Intermediaries said.
The Sensex traded 46 points or 0.24 per cent higher at 19,506 while the Nifty advanced 9 points to 5,916 as of 12.40 p.m.
Energy stocks were up nearly 1 per cent led by sharp gains in state-run explorer ONGC, which jumped 2.5 per cent on Q3 earnings. Drug maker Sun Pharma, IT outsourcer HCL Tech, mobile carrier Bharti Airtel and auto firms such as Tata Motors and Bajaj Auto traded with 1-2 per cent gains.
24 stocks traded lower on the Nifty led by infra major Jaiprakash Associates, which lost 3.7 per cent on account of disappointing Q3. Jindal Steel and Power shares were down 2.85 per cent ahead of Q3 numbers.
Unitech shares traded off the day's low. The stock was down 19 per cent after the CBI removed its lawyer in the 2G spectrum allocation scam case for allegedly colluding with Unitech's managing director Sanjay Chandra, who is an accused in the scam. (Read full story)
(With inputs from Reuters)