Euro zone economic sentiment has plunged to its lowest level since 1997 last month, according to a report by the European Commission that took full account of the impact of the September 11th attacks for the first time.
The closely watched business and consumer survey showed the 12-nation sentiment indicator dropped to 99.1 in October from 100.1 in September, falling below the average of the last decade for the first time since 1997.
Economists said the reading compounded pressure for interest rate cuts by the European Central Bank, which meets on Thursday following a US Federal Reserve meeting later today.
The index published by the European Commission undershot analysts' forecast of a 99.5 reading and fell further below the depths hit in autumn 1998 when the Asian financial crisis fanned out into world financial markets.
"We are clearly seeing an impact from the events of September 11," Mr Ryan Shea, international economist at Bank One in London, said.
"If you tie this in with services activity it [the data] shows the economy is stagnant. This should keep up pressure on the ECB to cut rates this week," he said, adding he expected a 25-basis point reduction.
Markets are already gearing up for a rate cut after ECB President Mr Wim Duisenberg signalled yesterday the bank was ready to act on rates by saying he believed euro zone inflation would fall well below the bank's 2 per cent tolerance ceiling early next year.
Preliminary data on Monday showed inflation in the euro zone fell to 2.4 per cent in October.