Economy, already in recession, may contract again this quarter: Experts

European services and manufacturing output shrank more than estimated in February as the eurozone economy struggled to rebound from a contraction in the fourth quarter.

A eurozone composite index based on a survey of purchasing managers in both industries dropped to 49.3 from 50.4 in January, London-based Markit Economics said on its website on Monday. That's below an initial figure of 49.7 published on Feb 22. A reading below 50 indicates contraction.

Budget cuts by governments may curb the pace of Europe's recovery as countries across the region battle the sovereign-debt crisis. The 17-nation euro economy will shrink 0.3 percent this year, driven by a contraction of 1.3 percent in Italy and 1 percent in Spain, the European Commission said on Feb 23.

"It remains a close call" whether the eurozone economy will shrink for a second quarter, following a 0.3 percent contraction in the last three months of 2011, sending the region into recession, Chris Williamson, Markit's chief economist, said in Monday's report. "At this stage, our best estimate is that the region's GDP will have contracted by 0.1 percent in the first three months of the year."

The euro extended losses after the data were released, trading at $1.3166 at 10:26 am in Brussels, down 0.2 percent.

The European Union, attempting to turn the page on the two-year-old debt crisis, faces a first test this week as Greece's private creditors decide whether to sign off on a 106-billion-euro ($140 billion) debt swap.

The success of the biggest sovereign-debt restructuring in history, which was confirmed on the eve of last week's EU summit, depends on how many investors agree to the writedown by Thursday. Eurozone finance ministers will hold a teleconference on Friday to review the deal's outcome.

Williamson said the "steep declines" indicated by surveys for Italy and Spain suggest that their return to growth "still looks to be a long way off". The purchasing managers' index for Spanish services dropped to 41.9 in February from 46.1 a month earlier, while the gauge for Italy dipped to 44.1 from 44.8.

"Persistent weakness in countries such as Italy and Spain will also subdue any growth in other (eurozone) countries which traditionally depend on trade within the region, constraining recoveries in Germany, France and other northern euro nations," Williamson said.

By Bloomberg News in Brussels