BRUSSELS, BELGIUM - THE euro zone's two largest economies both reported a contraction in second quarter gross domestic product on Thurs, and within an hour data are expected to show the bloc as a whole suffered negative growth.

Germany - Europe's biggest economy - reported a 0.5 per cent quarterly fall in April-June GDP, which was better than the 0.8 per cent drop expected by economists.

But France was a negative surprise, shrinking 0.3 per cent quarter-on-quarter instead of expanding 0.2 per cent as expected by markets.

'Due to the French figures, which are very disappointing, we now expect a deeper fall for the euro zone as a whole - 0.3 per cent, rather than 0.2 per cent,' said Christoph Weil, economist at Commerzbank.

The European Union's statistics office will release its euro zone GDP estimate for the second quarter at 0900 GMT (5pm Singapore time).

'A technical recession in the euro zone is possible, because there is a chance that we will have a slight contraction in the third quarter as well, according to leading indicators in the last months,' Mr Weil said.

A technical recession is defined as two consecutive quarters of negative economic growth.

French Economy Minister Christine Lagarde rejected talk of a recession in France after the much-worse than expected figures, but economists were less upbeat.

'There is a significant chance of a technical recession in France over the middle two quarters of the year,' said Gareth Claase, economist at Royal Bank of Scotland.

German deputy economy minister Walther Otremba told Reuters he could not rule out that the German economy would shrink again in the third quarter.

The fourth biggest euro zone economy, Spain, grew 0.1 per cent quarter-on-quarter, just beating market expectations of no growth at all, but still at its slowest since 1993.

Economists said a scenario of a technical recession in the euro zone would almost certainly stop the European Central Bank from further rate rises, even though inflation was at a record high in July of 4.1 per cent year-on-year.

The ECB's target is inflation below, but close to 2 per cent.

'The question is when will they cut interest rates, but with inflation so high, the ECB cannot cut in the coming months - we expect a cut only in the third quarter of 2009,' Mr Weil said.

The ECB left rates unchanged at 4.25 per cent last Thurs and said risks to economic growth were starting to materialise.

Euro zone economic indicators have weakened sharply in recent weeks, with service sector morale and retail sales falling.

The service sector, which makes up roughly two thirds of the euro zone economy, contracted at its fastest pace in five years in July - a statistic mirrored in the manufacturing sector.

Euro zone retail sales, an indication of consumer demand, also saw their biggest ever annual fall in June. -- REUTERS