INSEE also lowered its forecast for overall growth in 2012 to 0.1 percent from 0.2 percent, further below the 0.3 percent on which the government has based its spending plans.
The Bank of France forecasts the French economy will contract by 0.1 percent in the final quarter of this year.
While France's economy posted 0.2 percent growth in the third quarter based on a 1.0 percent jump in manufacturing, INSEE expects a reversal in the final months of this year.
"Activity should thus fall in Q4 2012 (-0.2%), notably because manufacturing production is set to fall back distinctly (-1.5%)," INSEE said in its December forecasting report.
The agency expects the French economy to pick up in 2013, but only modestly with 0.1 percent growth in the first and second quarters.
But INSEE also expects unemployment to keep on climbing, with the economy shedding 40,000 jobs each quarter.
It sees the unemployment rate in mainland France rising to 10.1 percent in the final quarter of this year from 9.9 percent in the period from July to September.
INSEE expects it to rise to 10.5 percent in mid-2013.
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The INSEE forecasts also undermine the government's forecast of 0.8 percent growth in 2013, on which is pinned its pledge to the EU to cut the public deficit back to the 3.0 percent of GDP limit from 4.5 percent.
INSEE head of forecasting Cedric Audenis said if their forecast of 0.1 percent growth in the first and second quarters held then the French economy would have to grow by 1.0 percent in the final two quarters to achieve the government's 0.8 percent growth target.
Failure to hit the target could force the government to make more spending cuts and raise more in taxes.