The German Government has warned that the country's unemployment is set to continue rising and that a war with Iraq could destabilise its economy further.

The Economic and Labour Ministry also cut its growth forecast for Europe's worst-performing economy to 1.0%.

"Economic conditions for the coming months are rather difficult," said Economy Minister Wolfgang Clement.

A possible military intervention in the Middle East will have long-lasting negative effects Wolfgang Clement

Mr Clement attempted a cautiously optimistic note, suggesting there were "glimmers" of a recovery for the year ahead.

But he said a war with Iraq presented "an incalculable factor" which had not been taken into account in his projections.

War fears

"A possible military intervention in the Middle East will have long-lasting negative effects on the international financial markets, oil prices, and consumer and investor confidence," Mr Clement told reporters.

The government's annual economic report cut projections for Germany's gross domestic product (GDP) from 1.5% to 1%, as expected.

The figure is still marginally better than the 0.2% growth in 2002.

But Mr Clement admitted that unemployment was likely to rise from the current average of 4 million, or 9.8% of the workforce, to 4.2 million or 10%.

Cutting debt

The government insisted that it was committed to reducing its budget deficit, bringing it back below Europe's 3% limit.

I don't want to paint too positive a picture. Wolfgang Clement

Germany was criticised by European finance ministers earlier this month for allowing its deficit to soar to 3.8% in 2002.

"Under the current knowledge... we will be able to keep the deficit below 3%," said Mr Clement.

He dismissed suggestions that the rising euro was a threat to the economy and said the critical point at which exports may be hurt had not been reached.

'Glimmers'

Another positive sign was news that inflation in Germany was set to remain under control and pick up only slightly to an annual average of 1.5% this year from 1.3% in 2002.

"We are seeing the first glimmers of hope on the horizon in recent economic data," Mr Clement optimistically suggested.

"I don't want to paint too positive a picture.

"Developments are anything but satisfactory. But that makes these first positive signs all the more important."