July 6 (Bloomberg) -- European Union finance ministers said the region’s economy remains at risk even as signs emerge that the worst of the recession may have passed.

“There are some positive signals but at the same time, still the situation is worrying,” EU Monetary Affairs Commissioner Joaquin Almunia said before a regular monthly meeting of euro-area finance chiefs in Brussels today. “We have to work on it.”

European economic confidence rose to the highest in seven months in June, while a measure of manufacturing activity is also improving. Still, banks continue to restrict lending and unemployment is rising. The European Central Bank started buying 60 billion euros ($84 billion) of covered bonds today, its latest effort to ease credit tensions and encourage lending.

Some finance ministers echoed Almunia’s remarks. Spain’s Elena Salgado said that while a return to growth this year “is not so easy to achieve,” some signs of recovery will emerge and expansion will resume in 2010. Wouter Bos, finance minister in the Netherlands, said the economic contraction in the Dutch economy was probably smaller in the second quarter than in the first three months of the year.

ECB President Jean-Claude Trichet said on July 2 that euro- area economic activity this year “is likely to remain weak, but should decline less strongly than was the case in the first quarter.”

The ECB, which has cut its benchmark interest rate to a record low of 1 percent, has forecast that the economy will contract about 4.6 percent this year and 0.3 percent in 2010.

Budget Pressure

Officials’ efforts to staunch the slump are weighing on public finances and have pushed some countries over the EU’s deficit limit of 3 percent of gross domestic product. Ministers will set a timeframe for Hungary, Lithuania and Poland to bring their budget gaps to within the limit, having already set deadlines for Ireland, France, Spain and Greece.

“The real challenge for the euro group is to try to define when we are going to return to balanced budgets,” Belgian Finance Minister Didier Reynders said today. “We must try to see if there’s a way of putting everybody on the same path.”

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net; Mark Deen in Brussels at mdeen@bloomberg.net

Last Updated: July 6, 2009 13:09 EDT