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German manufacturing continued to contract in November, but at a slower pace

The downturn in the 17 economies that share the euro eased slightly in December, according to a closely watched survey.

The composite survey of thousands of firms by Markit showed a continued contraction - but at a slower rate than in November.

Manufacturing in Germany - the eurozone's strongest economy - shrank for the third month in a row.

However, the figures were not as bad as many economists had expected.

"It's an encouraging sign that the index didn't fall any further. Quite what will happen henceforth remains highly uncertain," said Markit's chief economist, Chris Williamson.

The composite Markit Purchasing Managers' Index (PMI) rose to 47.9 for December from 47 in November. A number below 50 indicates a contraction.

However, economists say the slowdown in the rate of contraction is unlikely to be enough to avert a recession.

And a separate report from Ernst & Young has predicted a "bleak" winter for the currency bloc.

The firm says a "mild" recession is likely in the first half of next year, leading to economic growth of just 0.1% for the whole of 2012.

Slowing contraction

The manufacturing index across the eurozone rose to 46.9 in December from 46.4 in November.

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Banks all over the eurozone... are only alive at the moment thanks to the sheer scale of the money they've been able to borrow from the ECB and from their respective national central banks”

Services, which account for the bulk of the eurozone economy, also rose to 48.3 from 47.5.

Markit said better figures for France and Germany accounted for much of the improvement.

France's service industry expanded slightly in December, whilst the contraction in the country's manufacturing sector slowed.

Germany's manufacturing survey improved slightly from 47.9 to 48.1.

A eurozone index measuring new orders also showed a rise.

Recession

However the survey still suggests the region is entering a recession.

"The eurozone suffered its worst quarter for two and a half years in the final three months of 2011 with PMI data suggesting the region's economy is likely to have contracted by 0.6%," said Mr Williamson.

That would be a bigger fall in economic output than many economists currently expect.

Improvements in France and Germany are expected to be offset by deep recessions in troubled economies such as Spain and Italy.

"Brutal austerity measures and a lack of strategy to regenerate growth indicates little prospect of the eurozone avoiding a recession," said Altaz Dagha, an economist at Westpac.

Market uncertainty

The news comes as European money markets continue to digest the latest efforts to stabilise the single currency bloc.

Spain successfully raised 6.03bn euros ($7.84bn; £5.06bn) in new funds on Thursday through a bond auction - more than it had expected.

The average interest rate on 2.45bn euros of the five-year bonds sold fell to 4.023% from 5.275% at a similar auction at the start of the month.

However, the rate on nine and 10-year bonds rose slightly on sales in September and October.

"(The Treasury) has surpassed its target again on strong demand. The result is surprisingly positive considering these times of market volatility," said Jose Luis Martinez, a strategist at Citigroup's Madrid office.