Europe's economy is giving policymakers plenty to think about

The comments come despite a report that showed growth dipped to 0.3% in the three months to the end of June, from 0.4% in the first quarter.

However, the European Commission is sticking to its forecast that growth will accelerate by the end of the year amid improved demand and output.

Growth in the fourth quarter is tipped to reach 0.6% from 0.4% in the third.

Time for a change

Thursday's figures - released by Eurostat, the European Union's statistical office - will increase speculation about the direction of interest rates in coming months.

The European Central Bank (ECB) has left its benchmark borrowing cost unchanged at 2% for more than two years as some of the region's largest economies creaked and teetered on the brink of recession.

With the outlook for growth improving, and annual expansion now forecast at more than 1.2%, there is a growing chance that rates may have to rise to keep inflation in check, analysts said.

The US has steadily lifted borrowing costs to 3.75% this year as its economy has improved and record oil prices have put upward pressure on the rate of inflation.

Mixed picture

ECB president Jean-Claude Trichet has said that European rates are at the right level, but has highlighted inflation as a serious - if short-term - concern.

Ideally, analysts said, the inflation rate would drop, allowing the ECB to leave rates unchanged and further stoke economic growth.

Data from Italy and France on Thursday highlighted the problems facing policymakers.

Italian industrial product jumped a more-than-expected 1.3% in August, and the July figure was revised higher to 0.9%.