The Office for National Statistics said industrial output, which accounts for 18% of the economy, dropped by 0.6% in March, less than the 0.8% drop forecast.
This was still enough to take the annual rate down 12.4%, the biggest year-on-year drop since records began in 1968, but analysts saw positive signs in the data.
"This continues the theme of economic recovery," said George Buckley, UK economist at Deutsche Bank. "While output is still falling, it may not be long until we see a return to growth."
On a calendar quarter basis, industrial output fell 5.3% in the first three months of this year, the steepest decline since 1974, though the ONS said this would not materially affect its already-published estimate of a 1.9% drop in British GDP in the first quarter.
Manufacturing output also fell less than expected in March, down 0.1% compared to economists' forecasts of a 0.8% drop for an annual fall of 12.9%.
"All in all, fairly positive data for the UK economy this morning," said Philip Shaw, chief economist with Investec.
"The industrial production figures are significantly better than expected and the February fall was revised sharply upwards ... It appears that the industrial side of the economy wasn't as weak through the first quarter."
Sterling rose to a session high against the dollar and the euro after the data.
Britain's trade deficit shrank to its narrowest since April 2007, as imports fell faster than exports.
The March trade deficit was 6.589 billion pounds, down from 6.834 billion in February.
The deficit with non-European Union countries was also its lowest since April 2007 at 3.307 billion pounds.
Sterling has fallen by around a quarter against major currencies over the past 18 months and has stabilized more recently.
The ONS said it was not possible to say if the improvement in the trade balance was definitely due to the currency move. (Reuters)
