June 1 (Bloomberg) -- The European Commission cut its second- quarter growth forecast for the economy of the dozen nations sharing the euro as oil prices surged, confidence slumped and record unemployment crimped consumer spending.

The region's economy will expand about 0.3 percent from the previous three months, the commission said today in Brussels, paring a May 12 prediction of 0.4 percent. The economy grew 0.5 percent and 0.2 percent in the previous two quarters, the European Union's statistics office, Eurostat, in Luxembourg said today.

``Growth has been too slow to boost employment and wages are rising at a very modest pace so it's not very favorable for households,'' says Amelie Derambure, an economist at Credit Agricole SA in Paris. ``Growth will remain sluggish.''

Consumers in Europe were the most pessimistic in more than a year, as companies including Adidas Salomon AG, the world's second largest sporting-goods maker, and Alstom SA, a French engineering company, cut jobs. Manufacturing in the dozen euro nations contracted for a second month in May, an industry survey showed today.

Oil prices, which increased 27 percent this year, are squeezing profit margins at companies including, Iberia Lineas Aereas de Espana SA, Spain's largest airline. Iberia reported a wider first-quarter loss because of higher fuel costs. PSA Peugeot Citroen, Europe's second-largest automaker, said on May 25 that surging energy costs may pare profits this year.

`Risk Factor'

``To see how great a risk factor oil prices are, you need only look at the lower growth forecasts,'' said Lutz Karpowitz, an economist at Bayerische Landesbank in Munich. ``Oil prices remain a burden even at this level, and there's always the chance they'll start rising again.''

Business confidence in the euro region dropped to a 21-month low in May, according to a commission survey published yesterday. The unemployment rate stayed at 8.9 percent in May, close to a five-year high, Eurostat said today.

Confidence in the economy may be further undermined after French voters rejected the European Union constitution in a referendum on May 29. Dutch voters may also reject the constitution in a referendum today, opinion polls show.

The euro fell the most since March against the dollar after the French rejection of the constitution. The euro bought 1.2312 at 9:19 a.m. in Brussels.

The decline of the euro ``provides a certain relief,'' said Economy and Labor Minister Wolfgang Clement on May 31. European economic growth is likely to accelerate to 0.4 percent in the third quarter, the commission said, sticking to its previous forecast.

ECB Interest Rates

The anemic pace of growth prompted Clement to call on the European Central Bank to cut interest rates to stimulate the economy. The Organization for Economic Cooperation and Development, which pared its 2005 growth estimate for the euro region on May 24 to 1.2 percent from 1.9 percent, also called on the ECB to trim interest rates.

The ECB has dismissed calls for lowering rates saying the current lending rates support growth.

Investors have all but abandoned expectations that the ECB will raise its benchmark interest rate this year, futures trading shows. The rate on the December Euribor interest-rate future was at a contract low of 2.09 percent at 9:20 a.m. in Brussels, down from 2.64 percent at the start of the year.

The contracts settle to the three-month euro area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's key rate since the currency's launch in 1999. The Euribor three-month money market rate was 2.13 percent.

To contact the reporter for this story: Meera Louis in Brussels at Mlouis1@bloomberg.net.

Last Updated: June 1, 2005 05:08 EDT