Falling investment and private consumption led to the first ever quarterly contraction in the euro zone economy from April to June, while July retail sales and August services sentiment signalled more weakness ahead.
The euro currency sank to a new eight-month low after the data which added to fears of a recession in the region.
Confirming an initial estimate issued last month, European Union statistics office Eurostat said today the economy of the 15 nations sharing the euro shrank 0.2 per cent from the first three months of 2008.
It was the first quarter-on-quarter decline since the data series for the euro zone started in 1995. The next weakest result was 0.0 per cent growth in the second quarter of 2003.
The economy grew just 1.4 per cent year-on-year, a revision from the 1.5 per cent rate of expansion reported on August 14th.
A quarterly investment drop of 1.2 per cent knocked 0.3 percentage points off the overall second-quarter result for the euro zone, and a fall in household consumption took away another 0.1 percentage points.
Government spending added 0.1 percentage points and inventories were neutral. The contribution from net trade was zero, as exports fell 0.4 per cent on the quarter because of the strong euro and slowing export markets while imports declined by the same amount underlining domestic demand weakness.
The European Commission linked the second-quarter slip to a strong performance by the economy in the previous three months.
The contraction in the euro zone was still smaller than in the world's second-biggest economy Japan, which shrank 0.6 per cent in April-June against the previous three months but contrasted with a 0.8 percent expansion in the United States.
The euro fell on today's data to hit $1.4386, its lowest since January.
Separate data released today showed the euro zone's service sector, which accounts for almost two thirds of its economy, was below the 50.0 mark that divides growth from contraction for the third consecutive month in August.
The employment sub-index of the services PMI survey hit its lowest level since February 2004 and showed jobs were being lost faster than new posts were being created in the sector.
Falling euro zone activity, pulled down by weakness in the three big economies of Germany, France and Italy, plus weaker economic sentiment in July and August have raised the risk of a technical recession, defined as two consecutive quarters of negative growth.
Economists expect the slowing economy will gradually reduce inflationary pressures in the euro zone and eventually give scope for the European Central Bank to cut interest rates.
The ECB meets on rates tomorrow and is expected to leave the cost of borrowing unchanged at 4.25 percent. Economists expect an interest rate cut could be delivered in early 2009.
Continued weakness of household consumption was visible in July retail sales data, also released by Eurostat on Wednesday.
Retail sales in July fell 0.4 perc ent month-on-month and 2.8 per cent year-on-year - more than expected by markets.
Eurostat also revised down June's retail sales to show a sharper than previously reported fall of 0.9 per cent month-on-month and 3.2 per cent year-on-year.