Euro zone economic growth will slow sharply next year as weak confidence undermines investment and consumption and tighter fiscal policies reduce domestic demand, the European Commission said on Thursday.

"Growth has stalled in Europe, and there is a risk of a new recession," Vice-President for Economic and Monetary Affairs Olli Rehn said in a statement.

In its twice-yearly economic forecasts for the 27 countries of the European Union, the EU executive said it expected economic growth in the 17 countries sharing the euro to slow to 0.5 per cent in 2012 from an expected 1.5 per cent this year.

Growth is to pick up to 1.3 per cent in 2013, the Commission forecast. The European Central Bank forecast in September that euro zone growth in 2012 would be between 0.4 and 2.2 per cent after 1.4-1.6 per cent this year.

The Commission expects the euro zone economy to contract 0.1 per cent quarter-on-quarter in the last three months of 2011 and sees zero growth quarter-on-quarter in the first three months of 2012.

"We do not expect a recession in our baseline scenario. But the probability of a more protracted period of stagnation is high. Given the unusually high uncertainty around key policy decisions, a deep and prolonged recession complemented by continued market turmoil cannot be excluded," the Commission said.

NO IMPROVEMENT SEEN IN EU EMPLOYMENT

Consumer price growth in the euro zone should also slow sharply, to 1.7 per cent in 2012 from 2.6 per cent expected in 2011, the Commission said.

Inflation is then to decelerate even further to 1.6 per cent in 2013 -- well within the ECB's target of below, but close to 2 per cent. The ECB forecast in September that inflation would be in a range of 2.5-2.7 per cent in 2011 and 1.2-2.2 per cent in 2012.

"While jobs are increasing in some member states, no real improvement is forecast in the unemployment situation in the EU as a whole," Rehn said.

"The key for the resumption of growth and job-creation is restoring confidence in fiscal sustainability and in the financial system and speeding up reforms to enhance Europe's growth potential," he said.

Markets are concerned that public finances in Greece, Portugal, Ireland are unsustainable and effectively refuse to lend to them.

Italy, which has public debt of 120 per cent of GDP, and very slow growth, has become the latest market concern and its borrowing costs soared to unsustainable levels on Wednesday.

The Commission forecast that Italian public debt would remain unchanged at 120.5 per cent of GDP next year and ease to 118.7 per cent in 2013 -- on the assumption of unchanged policies.

Italy's budget deficit is to shrink to 2.3 per cent of GDP next year and 1.2 per cent in 2013, from 4.0 per cent expected this year.

The country that started the euro zone sovereign debt crisis, Greece, will see its public debt rise to 162.8 per cent of GDP this year from 144.9 per cent in 2010 and then to 198.3 per cent in 2012 and 198.5 per cent in 2013, assuming unchanged policies.

Greece, with the help of euro zone leaders, has negotiated a debt reduction deal with private investors of 50 per cent in October, but its details have yet to be worked out.

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