Euro-area services and manufacturing output contracted more thaneconomists forecast in October and German business confidencedropped to the lowest in more than 2 1/2 years as Europe'srecession deepened.

A composite index based on a survey of euro-area purchasingmanagers in services and manufacturing fell to 45.8, the lowest inmore than three years, from 46.1 in September, London-based MarkitEconomics said today. Economists had forecast a reading of 46.5,according to a Bloomberg News survey. A separate factory index inChina rose. In Germany, the Ifo institute's business climate indexunexpectedly dropped to 100.0 from 101.4 in September.

The European Central Bank and the International Monetary Fundhave both lowered their forecasts for the euro-area economy asgovernments cut spending to plug budget gaps, eroding consumer andexport demand. Even so, the region's debt burden rose to a recordin the second quarter, reaching 90 percent of gross domesticproduct, another report showed today.

“The euro-zone recession is still getting worse,” said HolgerSchmieding, chief economist at Berenberg Bank in London. “In adisappointing set of data, the fact that the Ifo expectations indexdid not decline further offers the only ray of hope. In this sense,the survey results today do not dispel the hope that the euroeconomy could turn the corner early next year.”

Ifo's measure of executives' expectations was unchanged at 93.2,while a gauge of the current situation dropped to 107.3 from110.3.

The euro extended losses on the Ifo and PMI reports and ahead ofthe Federal Reserve's policy decision later today. It traded 0.3percent lower at $1.2943 at 11:45 a.m. in London. European stocks,which slumped 1.7 percent yesterday, advanced as technologycompanies rallied, with the Stoxx Europe 600 Index up 0.4 percentat 269.61.

In the U.S., the Fed Open Market Committee will decide onmonetary policy at the conclusion of a two-day meeting later today,the last before the presidential election. Data on mortgageapplications and new-home sales are also due.

A gauge of euro-area manufacturing dropped to 45.3 in Octoberfrom 46.1 in the previous month, today's report showed. That's thelowest in two months. An indicator of services output rose to 46.2from 46.1.

Germany's manufacturing gauge dropped to 45.7 from 47.4, whilethe service indicator slipped to 49.3 from 49.7.

Euro-area governments may find it difficult to reduce deficitsand lower their debt burdens, with at least five of the 17 nationsusing the single currency already in recession.

'Steeper Fall'

The ECB said in its quarterly projections published on Sept. 6that the euro-area economy may contract 0.4 percent this yearinstead of a previously estimated 0.1 percent. That's in line withthe IMF's latest forecast. Both institutions cut growth projectionsfor next year.

“The euro zone has slid further into decline at the start of thefourth quarter,” said Chris Williamson, chief economist at Markit,in the statement. “While gross domestic product may decline onlymodestly in the third quarter, a steeper fall looks to be on thecards for the fourth.”

German economic growth slowed to 0.3 percent in the secondquarter from 0.5 percent in the first. “There are increasing signsthat a perceptible expansion of economic growth in the thirdquarter of 2012 will be followed by stagnation or even a slightdecrease in gross domestic product in the final quarter of theyear,” the Bundesbank said in its monthly report on Oct. 22.

German truckmaker MAN SE said on Oct. 12 that next year will beeven tougher than 2012 after third-quarter orders slumped. TheMunich-based company lowered its 2012 earnings forecast in July asweaker demand in Brazil added to woes in Europe.

Some companies are seeking to tap faster-growing markets tobolster sales.

Bayerische Motoren Werke AG, the world's largest maker of luxuryvehicles, will invest 200 million euros ($259 million) into aBrazil factory, Ian Robertson, head of sales and marketing toldreporters on Oct. 22. German rival Volkswagen AG's Audi brand plansto produce cars at a plant in Mexico.

In China, an October manufacturing index rose and economistshave pared forecasts for cuts in interest rates as confidence growsthat the world's second-biggest economy is stabilizing. Thepreliminary, or flash, reading was 49.1 for a purchasing managers'index released today by HSBC Holdings Plc and Markit, after a finallevel of 47.9 in September.

ECB President Mario Draghi last month announced the details anunlimited bond-purchase program to regain control of interest ratesin the euro area and fight speculation of a currency breakup. It'snow up to governments such as Spain to apply for aid from theregion's bailout fund to activate purchases.

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