Official figures show that the euro zone economy shrank for the first time in the second quarter, with gross domestics product down 0.2%.
The results, released by the the EU's Eurostat agency, will increase fears that the euro zone is heading into a formal recession. One economist said the figures would increase pressure on the European Central Bank to cut interest rates.
The euro zone had grown by 0.7% in the first three months of 2008, helped by a 1.3% rise in Germany. But separate figures this morning showed that both the German and French economies contracted in Q2.
Separate figures from Eurostat showed that the annual rate of inflation in the euro zone was 4% in July, slightly down from an initial estimate of 4.1%. The final figure equalled June's record level.
While annual inflation remained at a high, prices actually fell by 0.2% during the month of July, a sign of some easing as oil prices dropped.
IIB economist Austin Hughes said the figures signalled that the euro area could be faced with a weakening growth trend 'for some significant time', increasing the pressure on the European Central Bank to lower interest rates.
He said the scope for the bank to act quickly was limited by its fears about inflation, but markets may being to expect an aggressive easing by the ECB in the course of next year.
