May 6 (Bloomberg) -- European retail sales dropped by the most on record in March as the worst recession since World War II battered the region and households curbed spending.

Store revenue in the euro area fell 4.2 percent from a year earlier, the biggest drop since the data series began in 1996, the European Union’s statistics office in Luxembourg said today. The decrease was steeper than the 2.6 percent decline economists expected in a Bloomberg survey and followed a 4 percent drop in February. From the previous month, March sales fell 0.6 percent.

“The labor market is weakening rapidly and consumer confidence is still at pretty low levels,” said Jennifer McKeown, an economist at Capital Economics in London. “It is difficult to be very optimistic about the future.”

Household spending is declining as companies across the region reduce production and fire workers to cope with the economic slump. Europe’s unemployment rate rose to 8.9 percent in March, the highest in more than three years.

The euro was lower against the dollar after the retail- sales data were published. The European currency traded at $1.3307 at 10:55 a.m. in London, down 0.2 percent.

McKeown said the contraction in first-quarter gross domestic product may be even deeper than the 1.6 percent recorded in the fourth quarter, which was the most in at least 13 years. The statistics office is scheduled to release first- quarter GDP data on May 15.

Industrial Production

Spain’s industrial production shrank by 25 percent and bankruptcies almost quadrupled, as the global recession ravaged the economy and put it on course for its worst slump in 60 years, according to data published today. The euro-area economy may shrink 4 percent in 2009, the European Commission said this week, cutting its forecast to show a contraction twice as deep as it projected three months ago.

Metro AG, Germany’s largest retailer, yesterday reported a wider first-quarter loss as slumping consumer spending and weakening eastern European currencies hurt sales. Metro gets about 40 percent of its revenue from Germany, where the economy will shrink 6 percent this year, the government forecasts.

Lending to euro-region companies and consumers continued to decline in March and a European Commission survey shows households expect prices to fall over the next 12 months. Producer prices fell 3.1 percent in March from a year earlier, the biggest drop in 22 years, data showed yesterday.

Services Industries

Other data suggest the recession is easing. Europe’s service industries contracted at the slowest pace in six months in April, according to an index based on a survey of purchasing managers published today by Markit Economics.

The shrinking economy is increasing pressure on the European Central Bank to come up with alternative measures to spur lending and boost the economy of the 16-member euro region. The ECB will probably reduce its key interest rate by a quarter percentage point tomorrow to a record low of 1 percent, according to a Bloomberg survey of economists.

“This adds to other signs that the recession is still in full swing in the euro zone,” McKeown said. “Hopefully that suggests the ECB will implement bolder unconventional measures.”

To contact the reporter on this story: Jurjen van de Pol in Amsterdam jvandepol@bloomberg.net

Last Updated: May 6, 2009 05:58 EDT