German inflation for 2002 averaged 1.3%, the lowest rate for three years, a report has revealed.

That is a sharp drop from the 2.5% recorded the previous year.

Germany is the eurozone's biggest economy, and its economic performance is particularly important to the European Central Bank in deciding on interest rates.

Last week, the ECB kept its key interest rate unchanged at 2.75%.

Economists have been worried about sluggish growth in both France and Germany.

The threat of a US-led war against Iraq would further hinder economic performance, observers have warned.

Above target

France also reported inflation figures on Tuesday, with December consumer prices up 2.2% on the year, just 0.1% above the previous month.

Later on Tuesday, the European Commission is expected to publish a report saying EU states must speed up economic reforms to boost prospects for the eurozone economy.

Despite the low level of inflation in Germany, eurozone inflation as a whole is still higher than the ECB would like.

And while lower interest rates may help revive economic activity, they risk stoking consumer demand and feeding through into higher prices.

Annual inflation in Spain was 4% last year, double the government's official forecast.

Inflation across the 12-nation eurozone averaged 2.2% in December, above the bank's 2% target.