March 4 (Bloomberg) -- European consumer spending, which accounts for almost 60 percent of the economy, fell in the fourth quarter for the first time in six years, curbing economic growth.

Consumer spending in the euro area fell 0.1 percent, the first decline since 2001, after growing 0.5 percent in the previous three months, the European Union's statistics office in Luxembourg said today. Growth in gross domestic product eased to 0.4 percent from 0.7 percent, matching an initial estimate published on Feb. 14.

Soaring bread, milk and gasoline prices are eroding household spending power in the euro area even after unemployment fell to the lowest since records began in 1993. At the same time, the U.S. economic slowdown is reducing demand for European goods and the euro's increase to a record against the dollar is making exports less competitive, prompting companies to scale back investment.

The consumer figure ``is even worse than the very scant number we were expecting,'' said Aurelio Maccario, an economist at Unicredit MIB in Milan. ``Investment was today's good news. Prospects are less rosy though, since the trend will soften further in coming months.''

Today's figures, the first detailed breakdown of fourth- quarter GDP, show that company investment growth slowed to 0.8 percent from 1.2 percent, while government spending slipped 0.1 percent. Exports increased 0.5 percent, compared with 2.1 percent in the prior three months.

Producer Level

A separate report today showed inflation at the producer level accelerated in January to the highest in 17 months as energy costs jumped.

The deterioration in Europe's expansion may deepen this year as the worst U.S. housing recession in 25 years curtails growth in the world's largest economy and the euro's advance against the dollar threatens overseas sales.

The euro has risen 16 percent against the dollar in the past 12 months, reaching a record $1.5275 yesterday. It slipped less than 0.1 percent to $1.5196 as of 11:45 a.m. in Brussels today.

European stocks extended declines after the report. The Dow Jones Stoxx 50 fell 0.9 percent and the Stoxx 600 slipped 0.7 percent. Government bonds gained, reversing an earlier decline. The yield on the 10-year bund, Europe's benchmark, dropped 1 basis point to 3.85 percent.

From a year earlier, the euro-area economy grew 2.2 percent in the fourth quarter, revised from an initial 2.3 percent estimate. The economy grew an annual 2.6 percent in the third quarter.

Economic Growth

The European Commission on Feb. 21 cut its forecast for economic growth to 1.8 percent, 0.4 percentage point below the pace predicted in November and the weakest since 2005.

Confidence among executives and consumers fell in February for a ninth month, while manufacturing growth slowed, according to surveys published in the last week. Other indicators suggest growth may be holding up; expansion in Europe's services industries accelerated last month and business confidence in Germany, Europe's largest economy, rose more than economists forecast.

Against that backdrop, the European Central Bank has held off cutting interest rates as food and energy prices push inflation to a record. The central bank, which predicts GDP growth of 2 percent and inflation of 2.5 percent, will publish new forecasts on March 6, when its governing council holds its next meeting.

Producer-Price Inflation

Figures today show producer-price inflation accelerated to 4.9 percent in January from 4.3 percent in December. Energy price-growth accelerated to almost 11 percent, while prices for intermediate goods and durable consumer goods also picked up. Consumer-price inflation held at 3.2 percent last month, above the ECB's 2 percent ceiling, according to a report yesterday.

The producer-price report ``will maintain the ECB's concerns that inflationary pressures are potent down the supply chain and could increasingly feed through,'' said Howard Archer, chief European economist at Global Insight in London.

GDP in Germany grew 0.3 percent from the third quarter, when it increased 0.7 percent. Expansion in France and the Netherlands also eased, while Spanish economic growth accelerated to 0.8 percent from 0.7 percent.

The U.S. economy grew 0.2 percent in the final three months of 2007, after expanding 1.2 percent in the previous quarter, according to the EU statistics office figures. At the same time, growth in Japan, the world's second-largest economy, accelerated to 0.9 percent from 0.3 percent.

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

Last Updated: March 4, 2008 06:48 EST