Feb. 28 (Bloomberg) -- Confidence in the European economy unexpectedly rose in February for the first time in four months as unemployment fell to a record low and inflation slowed.

An index of sentiment among executives and consumers in the euro area increased to 109.7 from 109.2 in January, the European Commission in Brussels said today. Unemployment fell to 7.4 percent in January, a record low, and the inflation rate unexpectedly declined to 1.8 percent, separate reports showed.

The euro-area economy is growing faster than expected this year after recording the strongest pace in six years in 2006. The European Commission this month raised its 2007 growth forecast to 2.4 percent from 2.1 percent, even as former U.S. Federal Reserve Chairman Alan Greenspan warned this week that he couldn't rule out a U.S. recession later this year.

``The main story is inflation is benign, below 2 percent, and perhaps next month as well,'' said Martin Van Vliet, an economist at ING Bank in Amsterdam. ``But the ECB are clearly more focused on growth because they are concerned about a pickup in underlying inflationary pressures.''

The rate of expansion and declining unemployment may fuel wage demands and increase pressure on the European Central Bank to keep raising interest rates even as inflation remains below its 2 percent limit. Economists expect consumer-price growth to remain below the ECB ceiling for a sixth month in February, according a Bloomberg News survey of economists. The initial estimate for February inflation is due tomorrow.

More Workers

Another report due tomorrow probably will show that Europe's manufacturing expansion accelerated in February. Bouygues SA and Vinci SA, the world's two biggest construction companies, said today they will add 30,000 more workers this year as a French building boom boosts earnings.

The reports from Europe contrast with signs of weaker growth in the U.S. and Japan, the world's two largest economies. Japan's industrial production and U.S. durable-goods orders both fell the most in three years last month, figures this week showed. Still, the U.S. Conference Board's household-optimism index rose to a five-year high this month.

U.S. Economy

Greenspan, who retired in January 2006 after 18 years leading the U.S. central bank, said Feb. 26 that slowing growth in profit margins was a sign that the U.S.'s expansion might be winding down, according to the Associated Press. He acknowledged that most economists aren't predicting a recession.

There are signs that the euro area's expansion is easing from the 2.7 percent pace recorded last year. European retail sales fell for a second month in February after the German government's Jan. 1 increase in a sales tax discouraged shoppers in Europe's largest economy. Germany's Ifo business confidence index fell more than expected this month.

European confidence may weaken if a global slump in stocks that began yesterday becomes a prolonged decline. The slide started in China amid concern the government of the fastest- growing major economy will tighten controls on investment.

The Dow Jones Industrial Average declined 3.3 percent yesterday. Europe's Dow Jones Stoxx 50 index fell 0.9 percent today, extending yesterday's 2.6 percent drop.

Stock Slump

Chinese media reports today said the government won't impose capital-gains taxes on stocks and will allow overseas investors to buy more domestic equities. The Shanghai and Shenzhen 300 Index advanced 3.5 percent today, regaining some of yesterday's 9.2 percent drop.

Investors have pared bets on the ECB raising its key rate to 4 percent after March, futures trading shows. The implied rate on the three-month Euribor futures contract for September fell to 4.06 percent today, compared with 4.13 percent Feb. 26.

Still, ECB policy makers have warned that the pace of growth may fuel wage increases and fan inflation. ECB council member Nicholas Garganas said this week that inflation risks are ``clearly on the upside.'' The 7.4 percent jobless rate for January reported today marks the lowest since the data were first collated in 1993.

The central bank has already signaled it will raise its benchmark interest rate to 3.75 percent from 3.5 percent on March 8, which would be the seventh increase since late 2005.

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

Last Updated: February 28, 2007 07:57 EST