BRUSSELS/PARIS (Reuters) – The euro zone economy’s shrunk at the end of 2011 and will flirt with a mild recession under the weight of the sovereign debt crisis, but strength in France and resilience in Germany may keep it above water.

The drag is coming from a stricken, debt-laden south, epitomized by a slumping Italy.

Economic output in the 17-nation currency area fell 0.3 percent in the fourth quarter from the third, as expected by economists in a Reuters poll, the European Union’s statistics office Eurostat said on Wednesday.

The slump was the first contraction since the second quarter of 2009 at the height of the global financial crisis, when output shrunk 0.2 percent. The 27-nation EU economy also shrunk 0.3 percent in the October-to-December period.

But economic progress was very diversified.

“We seeing very wide regional divergences and this fourth quarter data doesn’t really help us see where the economy is going,” said Greg Fuzesi, a European economist at JP Morgan. “The fundamentals make you think the economy will stay in recession but business surveys suggest otherwise,” he added.

Underscoring just how poisonous the debt crisis has been for businesses and the economy, gross domestic product grew just 0.7 percent in the fourth quarter compared to a year earlier after posting 2.4 percent growth at the start of 2011, when Europe was recovering strongly from the 2008/2009 global financial crisis.

Despite signs of stabilization in January, helped by calmer capital markets and stronger growth in the United States, analysts in a Reuters poll predict the euro zone’s economy will still shrink 0.4 percent throughout 2012, returning to growth in 2013.

That is in line with the International Monetary Fund forecast of a 0.5 percent contraction in 2012.

GROWING APART

Even a mild recession masks the gap between the wealthy nations of northern Europe and those of the poorer, less productive south that lived beyond their means and now face years of austerity to cut debts and reform their economies.

Germany’s economy, the biggest in the euro zone, contracted slightly in the fourth quarter, but both it and France, which eked out anemic growth, performed better than forecast.

German gross domestic product contracted 0.2 percent, a slowdown from upwardly revised 0.6 percent growth in the July-September period, data showed on Wednesday.

France fared better, growing by a stronger-than-expected 0.2 percent in the fourth quarter from the previous three months as companies invested more and consumers continued to spend.

German ZEW think tank’s monthly poll of economic sentiment jumped for the third month in a row on Tuesday, to its highest level since April 2011, reinforcing signs that Europe’s largest economy is returning to growth.

“The first economic contraction since the end of the recession turned out to be weaker than expected, confirming that the German economy only took a growth pause and is not approaching a new recession,” ING’s Carsten Brzeski said.

France’s economy also beat expectations that it would shrink by 0.1 percent, growing by 0.2 percent, and economists said it too might avoid recession – defined as two consecutive quarters of negative growth.

BNP Paribas (BNPP.PA), France’s biggest listed bank, sounded an upbeat note at odds with the tone of many European rivals, predicting the euro zone debt crisis was stabilizing.

“The beginning of the year has been quite strong in investment banking … (We see) some kind of stabilization of the euro zone situation,” Chief Executive Jean-Laurent Bonnafe said in an interview with Reuters Insider TV, after reporting fourth-quarter results that were not as weak as expected.

Late last year, European Central Bank President Mario Draghi forecast a mild recession for the currency bloc as a whole. His latest assessment, given at a news conference following a monetary policy meeting last week, was that there was evidence of “a stabilization of economic activity at a low level.”

Finland posted quarterly growth of 0.7 percent. The exception in the northern half of the currency bloc was the Netherlands which subsided into recession, shrinking by 0.7 percent, following a third-quarter contraction of 0.4 percent.

NO SOUTHERN COMFORT

But further south, there was little solace for European economies that the European Commission warned this week were in need of reform and put them on a blacklist with pressure to act or face sanctions.

Italy’s economy contracted a steeper than expected 0.7 percent in the final part of last year, throwing the country into a slump expected to last for much of 2012 and joining Belgium, Portugal and Greece in recession.

The International Monetary Fund forecasts a full-year contraction of 2.2 percent in 2012, while the Bank of Italy sees a more modest decline of 1.2-1.5 percent. The government still has an official projections of -0.4 percent, considered unrealistic by all independent forecasters.

With wrangling over a second Greek bailout still unresolved, data on Tuesday showed Greece’s economy shrank by a stunning 7 percent year-on-year in the fourth quarter, much worse than a Q3 decline of 5 percent. The austerity measures demanded by its lenders are likely to make things even worse.

The latest figures also make it that much harder to reach its debt targets, calling into question the wisdom of cutting so deeply.

Euro zone finance ministers have dropped plans for a special face-to-face meeting on Wednesday on Greece’s new international bailout, saying political party chiefs in Athens had failed to provide the required commitment to reform.

Portugal, which many analysts expect to require bailing out for a second time too, suffered a 1.3 percent quarterly contraction in GDP, more than double the previous quarter’s 0.6 fall.

(Additional reporting by Gavin Jones in Rome and Sarah Marsh in Berlin, writing by Mike Peacock and Robin Emmott. Editing by Jeremy Gaunt.)

NEW YORK (Reuters) – Stocks rose Monday, led by banks after Greece’s parliament approved strict financial reforms needed to obtain an international bailout package.

The deal helps Greece avoid a potentially chaotic default, though the government remains under pressure to convince a skeptical euro zone that it will abide by the terms of the package.

Though Greece’s economy is small in the context of the euro zone, investors feared an unruly default could have eroded domestic bank profits and put weaker members of the region at risk, creating a threat to global economic growth.

Wall Street has rallied more than 20 percent since early October, in part on optimism that the euro-zone’s sovereign debt crisis was nearing resolution. Some analysts view equities as being extended.

“That the deal was approved really reduces a lot of the tension over the euro zone. But it was expected, and on a short-term basis, we’re very done to the upside,” said Yu-Dee Chang, chief trader of ACE Investments in McLean, Virginia.

“That’s why we went up and then backed off this morning. I’m cautious because there could be a short-term correction.”

The European banking shares index (.SX7P) gained 0.5 percent, and an index of Greek banks (.FTATBNK) surged 12 percent after the vote, which had sparked widespread rioting in Athens.

On Wall Street financials were the strongest performers.

Bank of America Corp (BAC.N) climbed 2.2 percent to $8.25 and Citigroup Inc (C.N) advanced 1.3 percent to $33.34. The KBW bank index (.BKX) added 0.6 percent.

The Dow Jones industrial average (.DJI) was up 47.53 points, or 0.37 percent, at 12,848.76. The Standard & Poor’s 500 Index (.SPX) was up 6.01 points, or 0.45 percent, at 1,348.65. The Nasdaq Composite Index (.IXIC) was up 18.03 points, or 0.62 percent, at 2,921.91.

The benchmark S&P index traded near the 1,350 level, seen as a resistance point and possible trigger for a pullback after a rally of more than 7 percent to start the year.

Apple Inc (AAPL.O) raised the stakes in an intensifying global patent battle with Samsung Electronics (005930.KS) by targeting Samsung’s latest model using Google Inc’s (GOOG.O) fast growing Android software, a move that may affect other Android phone makers.

Apple shares were up 0.8 percent to $497.30 after climbing to $500 for the first time, while Google rose 1 percent to $611.98.

Google is expected to win approval from European regulators, as well as from U.S. antitrust authorities, for its planned $12.5 billion purchase of Motorola Mobility (MMI.N), according to people familiar with the matter.

Regeneron Pharmaceuticals Inc (REGN.O) jumped 13 percent to $115.59 after the company significantly raised its 2012 sales forecast for its key eye drug, Eylea.

As earnings season moves into its final stages, 51 companies in the S&P 500 are scheduled to report results this week. According to Thomson Reuters data through Monday, of the 357 companies in the benchmark index that have released results, 64 percent have beaten analyst expectations.

President Barack Obama unveiled an election-year U.S. budget plan on Monday that would see a $6.7 trillion increase in the debt over the next decade despite what he called “very difficult” cuts to government spending and programs.

(Editing by Kenneth Barry)

NEW YORK (Reuters) – Stocks rose Monday as Greece’s parliament approved strict financial reforms needed to obtain its latest international bailout package.

The deal helps Greece avoid a potentially chaotic default, though the government remains under pressure to convince a skeptical euro zone that it will abide by the terms of the package.

Still, though Greece’s economy is small in the context of the euro zone, investors feared that an unruly default could have eroded domestic bank profits and put weaker members of the EU at risk, creating a threat to global economic growth.

Wall Street has rallied more than 20 percent since a closing low reached in early October, in part on optimism that the euro-zone’s sovereign debt crisis was nearing resolution. A deal in Greece was expected, setbacks and delays notwithstanding, and the lack of a substantial pullback in that time has some analysts viewing equities as extended.

“That the deal was approved really reduces a lot of the tension over the euro zone, but it was expected and on a short-term basis we’re very done to the upside,” said Yu-Dee Chang, chief trader of ACE Investments in McLean, Virginia.

“That’s why we’re went up and then backed off this morning. I’m cautious because there could be a short-term correction.”

The European banking shares index (.SX7P) gained 0.3 percent, and an index of Greek banks (.FTATBNK) surged 12 percent after the vote, which had sparked widespread rioting in Athens. The euro edged up slightly against the dollar.

Financials were the strongest performers on the S&P 500.

Bank of America Corp (BAC.N) climbed 2.4 percent to $8.27 and Citigroup Inc (C.N) advanced 1.4 percent to $33.38. The KBW bank index (.BKX) added 0.9 percent.

The Dow Jones industrial average (.DJI) was up 49.23 points, or 0.38 percent, at 12,850.46. The Standard & Poor’s 500 Index (.SPX) was up 6.59 points, or 0.49 percent, at 1,349.23. The Nasdaq Composite Index (.IXIC) was up 19.07 points, or 0.66 percent, at 2,922.95.

The benchmark S&P index traded near the 1,350 level, seen as a resistance point, which some analysts see as a possible trigger for a pullback after a rally of more than 7 percent to start the year.

Apple Inc (AAPL.O) raised the stakes in an intensifying global patent battle with Samsung Electronics (005930.KS) by targeting Samsung’s latest model using Google Inc’s (GOOG.O) fast growing Android software, a move that may affect other Android phone makers.

Apple shares were up 1.3 percent to $499.97, earlier topping $500 for the first time, while Google edged up 1.1 percent to $612.61.

Google is expected to win approval from European regulators, as well as from U.S. antitrust authorities, for its planned $12.5 billion purchase of Motorola Mobility (MMI.N), according to people familiar with the matter.

Regeneron Pharmaceuticals Inc (REGN.O) jumped 13 percent to $115.59 after the company significantly raised its 2012 sales forecast for its key eye drug, Eylea.

As earnings season moves into its final stages, 51 companies in the S&P 500 are scheduled to report results this week. According to Thomson Reuters data through Monday, of the 357 companies in the benchmark index that have released results, 64 percent have beat analyst expectations.

President Barack Obama unveiled an election-year U.S. budget plan on Monday that would see a $6.7 trillion increase in the debt over the next decade despite what he called “very difficult” cuts to government spending and programs.

(Editing by Padraic Cassidy)

LONDON (Reuters) – Stocks and the euro fell while safe-haven government bonds rose on Friday as final approval of a long-awaited Greek debt deal remained elusive, keeping alive the threat of a messy default.

Euro zone finance ministers gave a lukewarm response to an inter-party agreement from Athens on more austerity, and set more conditions for Greece to secure a second bailout needed to ensure it can meet debt repayments next month.

That tempered some of the enthusiasm in financial markets seen on Thursday after Greek political leaders clinched the austerity deal after weeks of wrangling.

“Despite yesterday’s agreement between party leaders over the austerity measures, traders still remain skeptical over whether they (Greece) can avoid a default,” said Jonathan Sudaria, dealer at Capital Spreads.

“Concerns were raised that Greece still hasn’t done enough to satisfy the criteria to receive a bailout.”

The FTSEurofirst 300 (.FTEU3) index of top European shares was down 0.6 percent at 1,066.73 points. The STOXX Europe 600 euro zone Banking Index (.SX7E), exposed to the euro zone’s sovereign debt crisis, fell 1.9 percent.

The euro was off a two-month high of $1.3322 reached on Thursday, trading down 0.2 percent at $1.3250.

Growth-linked currencies like the Australian dollar and commodities like copper and oil eased as investors cut exposure to risk and preferred the safety of U.S. Treasuries and German Bunds.

Risk appetite was also crimped after China’s trade activity fell in January the most since the depths of the financial crisis, raising concerns about the resilience of domestic demand that has shielded the world’s second largest economy from slackening exports.

(additional reporting by Atul Prakash; Editing by John Stonestreet)

FRANKFURT (Reuters) – The European Central Bank left interest rates unchanged on Thursday and financial markets’ attention will now shift to whether the bank is ready to help Greece avoid a messy default.

The ECB left its main interest rate on hold at 1.0 percent, adopting a ‘wait-and-see’ mode after some recent promising economic reports suggested the euro zone may be over the worst of a winter downturn.

“This is as expected,” said ING economist Carsten Brzeski.

“All eyes will be on Greece and the role of the ECB,” he said of ECB President Mario Draghi’s 1330 GMT news conference.

ECB policymakers remained divided on Wednesday on what contribution the bank could make to a restructuring of Greece’s sovereign debt, two euro zone monetary policy sources said.

With Greek leaders failing early on Thursday to agree on reforms and austerity measures, the price of a bailout, Draghi may say little on what, if anything, the ECB is ready to do.

While the ECB has ruled out joining private creditors in voluntarily accepting a reduction in Greek bonds’ value, it could send Athens, via a roundabout route, the profits from bonds it bought at below face value.

Some ECB policymakers are reluctant for the bank to show a willingness to share in the restructuring burden for fear of easing the pressure on Athens to agree spending cuts. The ECB is also prisoner to the Maastricht Treaty, which forbids the central bank from financing governments.

“The question is whether ECB independence has a price tag.” said Brzeski. “I think that the ECB taking a loss is out of the question – I’m looking for this to be confirmed, and maybe opening the door to eventually not taking a profit.”

LONG SHADOW

With the threat of a Greek insolvency casting a long shadow across the euro zone, Draghi will not go as far as some economists and declare the crisis over, even if the bloc turns out to be over the most acute phase of its economic slump.

Since the beginning of the year, some business surveys have instilled hope that the worst of the sovereign debt crisis has blown over and the euro zone economy is perking up. But there is enough doubt to keep the ECB watchful.

European stock markets and the euro extended two months of gains on Thursday as Greece edged closer to a bailout deal and investors bet a brace of central bank meetings would offer further support for the move into riskier assets.

However, with the ECB having warned of substantial downside risks to growth and the economy only slowly pulling off the ropes, the central bank could signal further easing is underway.

A Reuters poll of economists conducted before Thursday’s policy decision showed 41 of 71 respondents expected the ECB would cut by its March meeting.

Some other analysts say that as the March 8 meeting comes soon after the ECB’s February 29 second three-year liquidity operation, the bank will want to wait longer than that before touching rates, which it has not previously cut below 1.0 percent.

The central bank funneled banks 489 billion euros at a first three-year ultra-cheap loan operation in December, and is expected to refrain from announcing new measures while it waits to see how the February operation goes.

Francesco Papadia, a top ECB official, said on Wednesday bank liquidity concerns had all but disappeared thanks to the ECB’s December three-year loans, adding that he was tempted to declare ‘mission accomplished’.

Analysts also said the central bank could relax a bit.

With unlimited central bank liquidity, the ECB has pushed overnight market rates well below its main refinancing rate and its deposit rate, currently at 0.25 percent, acts as a floor for money markets.

Were Draghi to omit the word ‘substantial’ from the downside risks the ECB sees, this would be taken as indicating a smaller chance of a future rate cut.

More likely is that the ECB will make few changes to the wording of its policy statement as there are mixed messages in the data, with the latest monetary figures dismal.

“While the ECB will be in ‘wait and see’ mode for another month, ahead of the second three-year LTRO and the updated ECB staff projections in March, we expect today’s statement and press conference to leave the door open to a March rate cut, which is our baseline scenario as additional insurance is taken out against weaker growth,” said RBS economist Nick Matthews.

(Reporting by Sakari Suoninen. Editing by Jeremy Gaunt.)