The eurozone economy slipped closer to stagnation this month as the region's manufacturing sector contracted for the first time since September 2009.

Data released on Tuesday showed that Germany's private sector grew at its slowest pace in over two years in August, while France's manufacturing output shrank, dragging the overall eurozone manufacturing sector into reverse. Economists warned that the European economy has slowed sharply in the last few months and may struggle to expand at all this quarter.

"The eurozone economy grew only marginally again in August, suggesting that recent months have seen the weakest expansion for two years," said Chris Williamson of Markit, which compiles the research. "The data raises the prospect that economic growth in the third quarter could be even slower than the disappointing 0.2% rise seen in the three months to June," he predicted.

UK factories fared better during August, though, with the CBI reporting growth in order books and an increase in the number of manufacturers predicting increased output later this year.

Confidence suffers

Markit's monthly healthcheck of the eurozone found that the total activity across the region was flat month-on-month at 51.1, above the 50-point mark that separates expansion from contraction. But French manufacturing output dropped to 49.3, its first contraction since July 2009. The overall eurozone manufacturing sector came in at 49.7.

Germany's manufacturing sector, the powerhouse of Europe, increased its output to 52, but this was marred by a drop in service activity to just 50.4.

Williamson said that the eurozone economy had suffered from a drop in global demand, which dampened demand for exports. The ongoing euro debt crisis has also hit business confidence.

Seperate data from Germany underlined how the financial crisis has hit sentiment. The ZEW index, which tracks invester confidence, fell sharply this month. Economists said the size of the drop was surprising, and matched the plunge seen after the collapse of Lehman Brothers.

The ZEW economic expectations index dropped to -37.6 from a reading of -15.1 in July.

"The skepticism with regard to future economic growth shown by a growing number of financial market experts during the previous months has increased dramatically," said Wolfgang Franz, president of the Mannheim-based Center for European Economic Research, or ZEW.

Subdued picture

Martin van Vliet of ING said that the Markit data was not as bad as feared, but indicated that there was little sign of economic expansion in Europe.

"Despite the lack of change from last month, the August flash PMI survey still paints a very subdued picture. With little prospect of a near-term pick-up in external demand and the impact of the recent financial market turbulence yet to fully feed through into activity we cannot be too complacent about the risk of a new eurozone recession," van Vliet warned.

Earlier, HSBC's preliminary purchasing managers' index showed that China's manufacturing sector had contracted for the second month running in August. However there was optimism that the index rose to 49.8 from 49.3, showing that the decline had slowed.

HSBC chief economist Qu Hongbin said this showed there was little risk of China's economy suffering a "hard landing', after years of strong growth.