Falling sheep numbers amid one of worst droughts in a century could cause Australian wool production to fall by up to 10 per cent an industry group has warned.

Australian Wool Innovation predicts raw wool production to drop to 500 million kilograms in the current financial year from 550 million kilograms in 2001-02.

Sheep numbers in Australia, which supplies a third of the world's wool, are now at their lowest in at least 50 years and are expected to decline by 13 per cent in NSW and 18 per cent in Queensland this year because of the drought.

However, Australian Wool Innovation said that the strength of next season's production decline will depend heavily on the seasonal conditions over the remaining seven months of the 2002-03 season.