Aug. 29 (Bloomberg) -- Europeans' confidence in the economic outlook fell more than economists forecast this month as the economy teetered on the brink of a recession.

An index of executive and consumer confidence dropped to 88.8 from 89.5 in July, the European Commission in Brussels said today. That is below the 89.3 median forecast of 26 economists surveyed by Bloomberg News. Inflation fell to 3.8 percent from 4 percent last month and consumers' outlook on prices plunged.

Oil prices, which boosted inflation globally, have fallen almost 20 percent since reaching a record $147.27 a barrel last month. While that is easing fuel costs, inflation is still double the European Central Bank's target rate, prompting policy makers including Axel Weber to indicate they are in no hurry to cut interest rates even as growth slows.

``Growth in the euro area fell into negative territory in the second quarter and it is not inconceivable that GDP could also decline in the third quarter,'' said Dan McLaughlin, chief economist at Bank of Ireland Plc in Dublin. There has been a ``relentless sequence of weak data.''

Economists had forecast that inflation would remain at 4 percent, a 16-year high, in August, according to the median estimate of 31 economists in a Bloomberg News survey. National data this week showed inflation in Germany, Europe's largest economy, Spain and Belgium eased this month.

``After one positive data observation, it would be far too early for the ECB to give the all-clear on the inflation front,'' said Carsten Brzeski, an economist at ING in Brussels. ``However, we might have seen the peak of inflation already.''

Seven-Year High

The ECB, which aims to keep inflation just below 2 percent, raised its key interest rate to 4.25 percent on July 3, a seven- year high. While the central bank left the rate on hold this month, ECB Executive Board member Lorenzo Bini Smaghi said in a Bloomberg Television interview broadcast today that inflation is ``too high'' and must be brought below the bank's limit.

Still, most investors have pared bets on the ECB raising rates again as the economic outlook worsens, Eonia forward contracts show. The May contract yielded 4.15 percent today, down from 4.44 percent a month ago.

The 15-nation euro-area economy shrank in the second quarter while the region's manufacturing and service industries contracted in August. Factory orders in Germany have dropped for the past seven months.

Confidence among manufacturers fell more than economists forecast to minus 10 this month from minus 8 in July, while sentiment among retailers also declined, according to today's report from the commission. Consumer confidence rose 1 point from July's minus 20, staying close to a 5 1/2-year low. In the U.K., consumer confidence stayed near a record low in August, GfK NOP said today in a separate report.

In the euro area, unemployment remained at 7.3 percent in July, another report showed.

European companies and consumers see less chance of prices rising, the data indicate. A measure of companies' selling-price expectations fell to 17 in August from 20 in July. Consumers' outlook for prices dropped to 22 from 30, below its average reading for the past 18 years.

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

Last Updated: August 29, 2008 05:04 EDT