Looking Down

The European Commission said that its closely watched index gauging the economic mood in the 15-member euro zone slumped by 5.3 points to 89.5 in July to fall to its lowest level since March 2003.

Analysts had forecast that the index would drop from 94.8 points in June to 93 points this month.

"The euro zone economy is rapidly losing momentum," said Matthias Rubisch, economist with Germany's Commerzbank.

The July fall in the index was its biggest monthly decline since October 2001, the commission said, with the growing threat posed by higher energy and food prices triggering rising inflation just as global economic growth is contracting.

This is expected to result in preliminary data to be released Thursday showing euro zone inflation hitting 4.2 percent in July, which is more than double the European Central Bank's target of "close to, but just below 2 percent."

Britain, Italy hit hardest

Evidence of renewed inflationary pressures emerging in the euro zone prompted the ECB to hike rates for the first time in more than a year earlier this month with the bank raising its refinancing rate by 25 basis points to 4.25 percent.

Some analysts believe that the ECB might follow up this month's rate rise with another monetary tightening later in the year.

However, signs that the economic mood is darkening across Europe are likely to make it more difficult for the ECB's 21-head rate-setting council to deliver a further increase in borrowing costs in the coming months.

Tuesday's commission survey also showed the economic sentiment in the 27-member European Union falling sharply in July with the index dropping by 5.8 points to 88.7 points.

Britain and Italy both lead the monthly fall with Italy's economic index falling by 7.2 points.

The commission's economic sentiment index for Britain also dropped by 9.6 points, amid a slumping housing market and crimping economic growth.