The International Organisation of Vine and Wine (OIV) said world production was down around 6% in 2012 at 251 million hectolitres (Mhl), a level it described as very low.
European Union output fell 10% to 141 Mhl, with France suffering a drop of nearly 17% after a good harvest in 2011.
"We had a difficult year 2012, mainly because of a sharp drop in production, but trade flows mostly held stable," OIV Director-General Federico Castellucci told reporters in Paris, referring to total wine exports which were stable at 101 Mhl after a long-term upward trend.
The EU policy of digging up vines to end years of surpluses had lead to a reduction of 269,000 hectares between 2008 and 2011, well above the targeted 175,000 hectares, contributing to a recent rise in prices, Castellucci said.
Attempts to liberalise the EU market have been controversial. The European Parliament voting on 13 March to reverse plans to phase out vine planting limits by 2016 and the EU Council of agricultural ministers this week voting to to extend them by three years to 2019.
Rising consumption also helped push prices up.
"This meant tightness on the market and we need to be careful because once a market is lost it is hard to conquer it back," he said, pointing to higher prices for bulk wines, used to make liquors such as brandy and vermouth or vinegar.
Prices for French bulk red wines gained 7% between August and February, while bulk white wines rose 30%, data by French farm office FranceAgriMer showed.
French exports rise
French exports rose 6% to 15 Mhl, but Italy and Spain, the world's two largest wine exporters by volume, which also had a poor crop although not as bad, saw their exports fall 7% and 13% respectively to 21.5 and 19.1 Mhl.
Chile, the largest South American producer which had a record output in 2012, saw a 13% rise in exports to 7.5 Mhl. South African exports were up 17% to 4.2 Mhl.
This meant that the share of the top five European producers - Italy, Spain, France, Germany and Portugal - in world exports fell to 62%, from 65% last year, to the benefit of South America as well as the United States whose crop jumped 7% last year, the OIV said.
Wine consumption increased 0.6% in 2012 to 245 Mhl, mainly helped by China and the United States, the OIV said.