The European Central Bank (ECB) is expected to spurn demands for a further drastic cut in interest rates this week, despite evidence that the eurozone is sliding into a brutal slump.

Dire economic indicators have fuelled fears that the 16-nation zone is facing its deepest recession since the Second World War, but the ECB is widely tipped to limit a new rate cut this week to a half-point, or even as low as a quarter-point.

The Frankfurt-based central bank has already lowered official eurozone rates by 1.75 percentage points, from 4.25 per cent to 2.5 per cent, between October and December, and some of its most senior officials have signalled marked reluctance to rush into further, aggressive action.

The ECB's cautious strategy is provoking controversy among eurozone political and business leaders as the strains on the economy rapidly multiply. Demands for the ECB to be bolder and more radical have escalated as the bleak news has piled up. Last week, official figures showed manufacturing output across most of the single currency area crumbling, with industrial production in Germany, the zone's biggest economy, plummeting by 6.4per cent in the year to November — the sharpest fall since 1993.

Other key indicators have been all but uniformly grim. The key gauges of conditions in the purchasing managers' surveys of both manufacturing and services have fallen for eight months in a row, with activity in both sectors dropping at the fastest rates for at least a decade. Confidence among eurozone businesses and consumers sank to record lows in December.

In addition, eurozone exports are being battered by last year's surge in the value of the euro against the sliding dollar, making eurozone goods and services much more expensive in key overseas markets.

The strains facing eurozone businesses are being aggravated by a persistent credit crunch as companies struggle to secure finance amid a lending drought.

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