June 1 (Bloomberg) -- Europe's economy grew at three times the pace of the U.S. in the first quarter as investment by companies surged the most in a decade, countering a drop in consumer spending.

The economy of the 13 nations that share the euro expanded 0.6 percent from the fourth quarter, when it grew 0.9 percent, Eurostat, the European Union's Luxembourg-based statistics office, said today. Unemployment fell to a record low of 7.1 percent in April, according to a separate report.

Companies across Europe have stepped up investment to meet increased demand. With unemployment falling and business and household confidence at a six-year high, the expansion is being sustained in the current quarter, keeping Europe's economy on course to outperform the U.S. for the first time since 2001.

Europe's economy ``benefited from impressively strong investment and a significant building-up of inventories,'' said Howard Archer, chief European economist at Global Insight in London. The decline in unemployment ``should be supportive for consumer spending, which has so far been the softest link in the growth story.''

Growth in business investment spending accelerated to 2.5 percent in the first quarter, the fastest pace since the second quarter of 1997, from 1.5 percent in the fourth quarter, today's report showed. Consumer spending slipped 0.1 percent, its first decline since the last three months of 2001.

U.S. Expansion

Europe's growth compares with U.S. expansion of 0.2 percent in the first quarter from the prior quarter, according to Eurostat. From a year earlier, the euro-area economy expanded 3 percent in the first three months of 2007, revised from an earlier estimate of 3.1 percent.

Reports this week indicate that the euro area is maintaining its growth momentum. Business and consumer confidence unexpectedly rose last month to the highest since 2001, and unemployment in Germany, the region's biggest economy, held at a six-year low in May.

Still, there are signs that growth is peaking rather than accelerating. Manufacturing growth in the euro area unexpectedly slowed last month, according to a report today. European retail sales fell in May by the most in four months, a survey of purchasing managers said on May 30.

2007 Forecast

The European Commission today predicted that the euro-area economy will expand 0.6 percent this quarter and next, before growth eases to 0.5 percent in the final three months of the year. The economy grew 2.7 percent last year, the most since 2000, and the commission last month raised its 2007 forecast to 2.6 percent, saying it expects Europe to outpace the U.S. for the first time since 2001.

The euro slipped 0.1 percent to $1.3438 today. Bonds were little changed, with the yield on the benchmark two-year German note down less than 1 basis point at 4.38 percent at 12:01 p.m. in Brussels. Still, the yield has risen five basis points this week. Bond yields move inversely to prices.

A slowdown in the pace of U.S. economic expansion may damp demand for European goods this year, curbing export growth. The world's largest economy grew at a 0.6 percent annual rate in the first quarter, the weakest in more than four years, the Commerce Department said yesterday.

Euro-area exports rose 0.3 percent in the first quarter, according to today's report, after growing 3.5 percent in the previous three months. While the euro's 4.1 percent gain since mid-January makes European goods less competitive, the currency has fallen 1.5 percent since reaching a record $1.3681 April 27.

Unemployment Rate

The 7.1 percent unemployment rate for April is down from 7.2 percent in March and is the lowest since the data series began in 1993. EU Monetary Affairs Commissioner Joaquin Almunia said yesterday the jobless rate could move below 7 percent by next year, further bolstering consumer spending.

D+S Europe AG, a German maker of software for call centers, said on May 15 it will add 600 new jobs this year. DAF Trucks NV, the Dutch division of U.S. truckmaker Paccar Inc., this week said it plans to increase daily production at its main plant by about 5 percent.

``Economic growth is strengthening,'' European Central Bank council member Lucas Papademos said today in Athens. ``Incoming data confirm the view that the outlook remains positive.''

The ECB is concerned that companies will raise prices and wages as the euro-area economy expands at close to the fastest pace in six years. Papademos's ECB colleagues Klaus Liebscher and Nicholas Garganas said this week that the central bank should keep its options open even after the interest-rate increase that policy makers have signaled for next week.

`Strong Vigilance'

The ECB has increased its key lending rate seven times to 3.75 percent since late 2005 to slow inflation.

``I belong to those that say that you shouldn't exclude anything in the future,'' Liebscher said yesterday. ``Strong vigilance is needed to ensure that risks to price stability do not'' materialize over the medium-term.

The bank forecasts consumer-price growth to average about 1.8 percent this year, holding below its 2 percent limit for the first time since 1999, before accelerating to around 2 percent in 2008. It will publish revised growth and inflation projections next week.

The commission presented its quarterly forecasts as ranges built around a mid-point. It predicted growth of 0.4 percent to 0.8 percent in the second quarter and the third, and growth of 0.2 percent to 0.8 percent in the fourth quarter.

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net

Last Updated: June 1, 2007 07:32 EDT