Although Irish construction activity is at a four-year low, EU monetary affairs commissioner Joaquin Almunia has said the US subprime lending crisis will not have a major impact on economic activity in Europe.

New research has shown that all sectors of the Irish construction industry are now contracting - not just the housing sector.

The monthly Ulster Bank Construction Purchasing Managers' Index (PMI) stood at 43.8 in August, down from 47.5 in July.

An index of 50 indicates zero growth, while any reading lower than that indicates a reduction in activity. Overall construction employment fell at the fastest rate for just over four years.

The housing sector has been worst hit and was at 31.4 in August, down from 33.8 the previous month. Commercial and civil engineering activity have also started to contract. Commercial is at 49.9 down from 52.7, while civil engineering is at 44.6, down from August's figure of 51.6.

"A weak housing sector in August was expected, but the readings for commercial and civil were surprisingly low," said Pat McArdle, chief economist, Ulster Bank. "The only unusual factors were the weather, which was the poorest for many years and the general sense of gloom that prevailed as reports of construction lay-offs were plentiful."

Mr Almunia said he expects the fallout from the US crisis to only dent European growth in 2007, but there may be a medium-term impact if it persists.

"I think activity in 2007 will not be strongly affected by the turbulence following the subprime crisis," said Mr Almunia at an economic forum in Cernobbio, near Milan at the weekend. "The central scenario continues to be one of clear recovery of the European and euro-area economy."

He said the downside risks to growth in the next months had increased, but added that "optimism" had not disappeared.

Speaking at a meeting of central bankers in Switzerland, John Hurley, governor of the Central Bank, said it was too early to change his view on the outlook for the euro zone, which the European Central Bank expects to grow by 2.5 per cent this year.

"My position is very much the position that we have forecast - that the outlook is good, but there is a good deal of uncertainty," he said.

The credit crisis in the money markets looks set to worsen again this week as over $113 billion (€82 billion) of commercial paper is to be refinanced. Structured investment vehicles set up by banks have been using asset-backed commercial paper to fund longer-dated, senior debt. - ( Additional reporting, Reuters )