The recession continued to deepen last month as industrial production fell another 0.6 percent, led by sharp declines in the output of basic materials and business equipment, the Federal Reserve said yesterday.

The economy's weakened condition continued to hold inflation in check. The Labor Department said temporary auto rebates and falling consumer food costs pushed down producer prices for finished goods by a seasonally adjusted 0.1 percent in September compared with 0.6 percent increases in July and August.

The production report was the last one scheduled before next month's congressional elections, which means there will be no statistical news indicating the recession is over before voters cast their ballots. A preliminary estimate for third-quarter gross national product will be available next week, but Treasury Secretary Donald T. Regan said yesterday that it will show virtually no increase in total output.

During a bill-signing ceremony at the White House yesterday, President Reagan hailed the good news about lower inflation but made no mention of the bad news about the continuing decline in the economy.

"Bringing down inflation brings down interest rates, which brings back the economy," Reagan declared. "And what a better way to cap off a big week of momentum toward recovery than this morning's producer price index report . . . up only 3.1 percent so far this year. If that rate holds steady, it will be the best performance in 10 years."

The industrial production index, which measures the output of the nation's factories, mines and utilities, fell to its lowest level in more than 6 years in September for a decline of 9.4 percent in the last 12 months.

The drop in production of materials--particularly in parts for consumer goods and for business equipment--suggests that more cutbacks in output may be in store for those parts of the economy, analysts said.

On Sept. 22, automobile manufacturers -- who assembled the same number of cars in September as in August -- dropped the rebates that helped boost their sales last month. The rebates represented a 6.3 percent drop in the prices that dealers paid for the cars. Even with the added sales, car makers still faced swollen inventories on dealers' lots. As a result, they cut production schedules for October.

That could mean another drop in industrial production this month, while the end of the rebates will show up as an increase in car prices that will add to the producer price index for October, analysts said.

Secretary Regan, who earlier this year predicted that a strong recovery would be underway by spring, maintained yesterday that "we are somewhere in the bottom or perhaps somewhere on the upswing" from the recession. "We will not know with certainty for another six months" because of the lag in getting firm, reliable data about the level of economic activity, he said.

"This has to be a consumer-led recovery," Regan said. "We hope that it will come in the Christmas season. . . . Consumers are in a position to buy as soon as they have the confidence to do so."

Regan said he expects the economy to expand by between 3 1/2 and 4 percent next year, after adjustment for inflation. That rate is "achievable," he said, adding, "That is not the strongest recovery in the postwar period. That's way below normal, in fact."

The Treasury secretary said a recovery moving at that speed would mean that unemployment -- which he acknowledged probably will go higher than September's 10.1 percent rate before turning down--would fall no more than "one point, perhaps a point and a half in a year." With a faster recovery, "You could get a rise in prices," he warned.

September's drop in the prices for finished goods left the index with a gain of 3.6 percent over the last 12 months. Consumer food prices dropped one-half percent for the month and were up only 1.4 percent over the year. The auto rebates accounted for about two-thirds of the slowdown in this measure of inflation between August and September, the Labor Department said.

The index for energy prices rose only 0.4 percent after having shot up more than 11 percent in the preceding three months. Prices of gasoline and heating oil fell, nearly offsetting a large jump in natural gas prices.

Prices for intermediate goods--such as flour, synthetic fibers, lumber and steel mill products that are used to make other goods--were unchanged over the month and up 0.3 percent for the year. Prices for crude materials fell 1 1/2 percent in September and declined 3.4 percent over the course of the last 12 months.

According to the Federal Reserve, production of business equipment fell 1.6 percent in September as businesses continued to reduce their investment plans. Output of such equipment was running 18.3 percent below its year-earlier level. The decline in materials production left that category down 13.6 percent in the last 12 months.

The only major portion of the total production index to show an increase over the year was defense and space goods, which was up 7 percent.

In a separate report, the Fed announced that the nation's money supply -- as measured by M-1, which includes currency in circulation and checking deposits at financial institutions -- rose $6.9 billion in the week ended Oct. 6 to a level of $464.9 billion. tables, D12

The unusually large increase, which analysts said was due to technical factors, meant that the money supply rose at about a 10 percent annual rate during the third quarter, double the pace intended by the Fed.

Last week Fed Chairman Paul A. Volcker confirmed that the central bank would abandon at least temporarily changes in M-1 as a guide for policy because it would be subject to distortion in coming weeks.

The action caused interest rates to fall, sparking a huge rally in the stock and bond markets. Had the Fed stuck with M-1, its normal operating procedures would have called for a tightening of credit and higher interest rates to bring growth of M-1 within the Fed's target range.