An outdoor market in Sulmona, Italy. Europe's economy is showing increasing signs of a slowdown as governments struggle to contain the fiscal crisis and avert a Greek default. [Marc Hill / Bloomberg]

LONDON - European confidence in the economic outlook dropped more than economists forecast in September to the lowest in almost two years, reflecting growing concern that the worsening debt crisis could push the economy into a recession.

An index of executive and consumer sentiment in the 17-nation eurozone fell to 95 from a revised 98.4 in August, the European Commission in Brussels said on Thursday. That's the lowest since December 2009 and below 96 projected by economists, according to the median of 31 estimates in a Bloomberg survey.

Europe's economy is showing increasing signs of a slowdown as governments struggle to contain the fiscal crisis and avert a Greek default. About three-quarters of global investors surveyed by Bloomberg this week anticipate the eurozone will fall into a recession during the next 12 months, with more than a third predicting the European debt crisis will derail the world economy in that period.

"The escalating sovereign-debt crisis and the resulting tensions in the banking sector are clearly weighing on sentiment and activity," said Aline Schuiling, an economist at ABN Amro Bank NV in Amsterdam. "Indeed, we expect the economy to contract in the third and fourth quarters."

Investor confidence

Manufacturing and services output contracted for the first time in more than two years in September, eurozone data showed last week. In Germany, Europe's largest economy, business sentiment decreased for a third month in September and investor confidence dropped to the lowest in more than two and a half years.

A gauge of sentiment among European manufacturers dropped to minus 5.9 in September from minus 2.7 in the previous month, the Thursday report showed. An indicator of services confidence fell to zero from 3.7, while a measure of consumer confidence decreased to minus 19.1 from minus 16.5. Sentiment among builders also worsened in September. The commission had previously reported an August reading of 98.3 for the overall confidence indicator.

The International Monetary Fund (IMF) on Sept 20 cut its eurozone growth forecast for this year to 1.6 percent and 1.1 percent the next year. The Washington-based IMF had previously forecast the economy would expand 2 percent this year and 1.7 percent in 2012. The European Central Bank (ECB) predicts next year's growth to be about 1.3 percent.

'Escalating' crisis

A gauge of eurozone manufacturers' output expectations dropped to 0.2 from 5.9 in the previous month, Thursday's report showed. An indicator of order books slumped to minus 11.8, the lowest since October, while a gauge of employment expectations declined to minus 0.4 from 1.3 in August.

"A recession is becoming increasingly likely," said Christoph Weil, an economist at Commmerzbank AG in Frankfurt. "The escalating fiscal crisis is becoming an increasing concern to companies and consumers."

ECB Governing Council members Ewald Nowotny and Luc Coene said the central bank may look at stepping up efforts to boost growth as soon as next month. They both identified renewed 12-month lending to banks as an option. ECB Executive Board member Lorenzo Bini Smaghi said on Monday that it's important to "reassure the markets".

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