Jan. 31 (Bloomberg) -- European economic confidence plunged more than economists expected this month on concern that a U.S. slowdown will crimp global growth and as inflation accelerated to a 14-year high.

An index of executive and consumer sentiment in the euro area dropped to 101.7, the lowest since January 2006, from a revised 103.4 in December, the European Commission in Brussels said today. A separate report showed the inflation rate rose to 3.2 percent, the highest since December 1993.

Slowing economic growth and soaring prices have created a dilemma for the European Central Bank, which aims to keep inflation just below 2 percent. While ECB officials say the U.S. slowdown will affect euro-area growth, accelerating inflation has restrained them from cutting interest rates and put them in what the International Monetary Fund calls ``difficult'' position.

``The problems in the U.S. will have an impact on the rest of the world, including the euro area,'' said Luigi Speranza, an economist at BNP Paribas in London. ``We've been a bit skeptical about this decoupling idea,'' he said, referring to the theory that the rest of the world could pick up the economic slack as U.S. growth slowed.

Economists had forecast that confidence would fall to 104.1 from an initial December reading of 104.7, according to the median of 27 economists surveyed by Bloomberg News. Inflation was forecast to remain at 3.1 percent, a separate survey showed.

Half the Pace

U.S. economic growth slowed to a 0.6 percent annual rate in the fourth quarter from 4.9 percent in the prior three months, according to figures published yesterday. That was half the pace forecast by economists. Also yesterday, the U.S. Federal Reserve lowered its benchmark interest rate by half a percentage point, its second move in less than two weeks.

While the Fed's Jan. 22 emergency rate cut prompted investors to increase bets that the ECB would lower its benchmark rate later this year, ECB council member Axel Weber said Jan. 24 that such bets may be ``wishful thinking.''

The euro-area economy will be ``affected to some extent'' by slower U.S. expansion, ECB member John Hurley said yesterday. ``We haven't seen the same difficulties in the euro area,'' where economic growth ``is still strong,'' he said.

Euro-area unemployment remained at a record low of 7.2 percent in December, the statistics office said in a separate report today.

The inflation figure published today is an estimate by the statistics office, which will publish a final figure on Feb. 29.

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

Last Updated: January 31, 2008 05:00 EST