Gross domestic product shrank 0.5 percent from the second quarter, Friday's seasonally adjusted data from statistics service ELSTAT showed.

Economists polled by Reuters were expecting a quarterly contraction of 2.7 percent as they factored in the effect of controls that, from the end of June, restricted Greeks to daily withdrawals of 60 euros (42 pounds) from cash machines.

"It is clearly a better-than-expected reading, confirming the resilience of the economy that was reflected by other indicators such as retail sales and industrial production," said National Bank economist Nikos Magginas.

He said the reading suggested Greece was heading for a milder recession that expected, forecasting the economy would shrink less than 1 percent in 2015 as a whole.

The official forecast is for a contraction of 1.4 percent.

Athens imposed the capital controls at the end of June to stem a flight of cash from banks by depositors unnerved at a stalemate in discussions with international lenders and speculation Greece could be forced out of the euro zone.

It eventually secured its third international bailout, and its future in the currency bloc, in August.

The economy expanded in the second quarter - ELSTAT cut its growth reading for the period to 0.4 percent from 0.9 percent on Friday - but the European Commission, the OECD and the EBRD all say Greece is heading into recession again after growth in 2014 ended a six-year depression.

Both the Commission and the OECD (the Organisation for Economic Co-operation and Development) see a 1.4 percent contraction this year, while the EBRD (the European Bank for Reconstruction and Development) sees 1.5 percent.

The light at the end of the tunnel, all three say, may be some growth returning during next year - but it is highly dependent on economic and banking reform.

Friday's data showed that year-on-year the economy shrank 0.4 percent in the third quarter, again beating economists' forecasts that predicted a contraction of 1.9 percent.

"The initial shock from capital controls and the bank holiday in early July seems to have been absorbed better than expected. The data point to a recession of well below 1.0 percent this year, most likely about 0.6 percent," said Eurobank economist Platon Monokroussos.

(Reporting by George Georgiopoulos and Michele Kambas; editing by John Stonestreet)

By George Georgiopoulos