A Daimler AG employee works on the Mercedes-Benz production line in Sindelfingen, Germany. European economic confidence slumped to the lowest in almost two years in October and German business sentiment dropped to a 16-month low. [Guenter Schiffmann / Bloomberg]

ZURICH - Europe's manufacturing industry contracted for a third month in October, adding to signs the eurozone economy is edging toward a recession.

A manufacturing gauge based on a survey of purchasing managers in the 17-nation eurozone fell to 47.1 from 48.5 in September, London-based Markit Economics said on Wednesday. That's below an initial estimate of 47.3 published on Oct 24. A reading below 50 indicates contraction.

Europe's economy is showing signs of a deepening slump as its worsening debt crisis erodes the confidence of consumers and executives alike. The Organization for Economic Cooperation and Development (OECD) on Monday lowered its eurozone growth projections for this year and next and called on the European Central Bank (ECB) to lower its benchmark interest rate at its meeting on Thursday.

"We remain of the view that the ECB will be cutting interest rates before long," Nick Kounis, head of macro research at ABN Amro in Amsterdam, said before Wednesday's report. "Although we think that interest rates will be left on hold this week, we expect a rate reduction in December."

'Mild negative growth'

In China, a manufacturing index dropped to the lowest since February 2009 last month. The Institute of Supply Management's US factory index declined last month and UK manufacturing output contracted.

The eurozone economy may expand 1.6 percent this year and 0.3 percent in 2012, the OECD said. It had previously projected growth of 2 percent in both years. The region may show a "marked slowdown with patches of mild negative growth", according to the Paris-based group.

Adding to signs of a slowdown, European economic confidence slumped to the lowest in almost two years in October and German business sentiment dropped to a 16-month low. Eurozone unemployment increased in September, suggesting companies are cutting costs to protect earnings.

Stuttgart, Germany-based Daimler AG, the world's third- largest maker of luxury vehicles, said on Oct 27 that third-quarter earnings before interest and taxes dropped 19 percent, missing analysts' estimates. Heidelberger Druckmaschinen AG last month lowered its full-year earnings forecast.

'Fears of recession'

"As the sovereign debt crisis and the ensuing euro crisis have escalated sharply in recent months", the "economic outlook has turned increasingly bleak", Volker Kronseder, chief executive officer of German packaging-equipment maker Krones AG, said on Oct 26. "Fears of recession have resurged even as the economy is doing well."

European leaders last week carved out a second Greek aid package after Prime Minister George Papandreou scraped together parliamentary approval for additional austerity measures. Greece will receive 130 billion euros ($179 billion) in public funds plus a 50 percent write-down of its debt.

The ECB has so far ignored calls for lower borrowing costs, instead opting to extend the use of unconventional tools. It last month decided to resume purchases of covered bonds and offer banks unlimited cash for up to 13 months.

Markit will publish final data for the composite and services indicators on Nov 4. It previously reported a drop in the services gauge to 47.2 in October from 48.8 in September.

Bloomberg News