Economic sentiment in the euro zone fell again in July as the bloc's economy deepened its slump and factory managers and businesses became more pessimistic, with talk of a possible Greek exit of the single currency likely in the forefront of their minds.

A worsening mood across all sectors, including the dominant services sector, dragged down the European Commission's sentiment index to 87.9 points in July from 89.9 in June, data showed today. Business sentiment fell for the fifth straight month.

Economists polled by Reuters expected a decline in economic sentiment to 88.7 points in the monthly survey of the 17 countries using the euro.

Europe's 2.5 year debt crisis has eaten away at fragile confidence that was badly damaged by the 2008/2009 financial crisis and is now suffering from concerns that indebted Greece may leave the euro and that Spain and Italy may need bailouts that the bloc can barely afford.

After the euro zone's economy stagnated in the first quarter and probably contracted in the second, the sentiment data points to a further contraction in the third quarter. For all of 2012, the economy is expected to contract 0.3 pe cent, the International Monetary Fund forecasts.

In a sign that the impact of the crisis is being felt across the bloc and not just in the indebted Mediterranean, morale dropped sharply in Germany, the bloc's biggest economy and largest contributor to the region's financial bailout funds, and also in France, the euro zone's other major economy.

Confidence in the manufacturing sector, crucial to the euro zone's still relatively healthy export industry, continued its downward trend that started in March as production expectations fell and managers worried about their order books.

The lack of demand at home, underscored by a 35-month low in consumer confidence in July, was highlighted earlier this month by French carmaker PSA Peugeot Citroen's decision to cut 8,000 jobs as it struggles with mounting losses.

Reuters