The eurozone economy will expand this year at the fastest rate since the turn of the century and the good times will continue in the coming years despite a slight slowdown in 2007, the European Commission forecast Monday.

Lifting past forecasts, the European Union's executive arm estimated that economic growth in the 12 nations sharing the euro would reach a rate of 2.6 percent this year before slowing to 2.1 percent in 2007.

Previously, the commission had predicted that growth would reach 2.5 percent in 2006 and 1.8 percent in 2007, but it decided to lift its estimates after a surprisingly strong performance in the first half of the year.

"Growth in Europe remains on the right track," said Luxembourg Prime and Finance Minister Jean-Claude Juncker after chairing a meeting of eurozone finance ministers in Brussels. "Growth has proved more robust than we thought a year ago, or even a few months ago."

The combined economy of the 25-nation EU is also enjoying the strongest growth in six years and is on course to expand 2.8 percent in 2006 and 2.4 percent in 2007, the commission estimated in its autumn economic forecasts.

The figures mark a sharp improvement from last year, when the eurozone economy grew only 1.4 percent and the EU economy expanded 1.7 percent.

"After years of disappointing results, the European Union economy in 2006 will be at its best since the beginning of the decade and is expected to grow at around potential in 2007 and 2008," EU Economic and Monetary Affairs Commissioner Joaquin Almunia said.

Sounding an even more upbeat note, Austrian Finance Minister Karl-Heinz Grasser for one said that the commission's forecasts looked "too pessimistic", judging from recent upbeat economic indicators.

"Given all the leading indicators, we have reason to believe that 2007 could be better than the forecasts of the commission," he told journalists as he arrived for the meeting with his eurozone counterparts.

Booming business investment and gradually rising consumer spending were fuelling the current economic boom, which would cool slightly next year because of higher taxes in some big member states and slower global growth, particularly in the United States.

Luxembourg's Juncker predicted that "the impact of the American downturn will be neither brutal nor dramatic", putting it down mainly to the housing market.

Despite the slowdown next year, the commission forecast that European economic growth would hold steady around its potential of 2.1-2.2 percent for the eurozone and 2.4 percent for the EU, signalling that good times are here to stay for at least the next couple of years.

Improving economic conditions would help bring down Europe's stubbornly high unemployment with five million jobs expected to be created in the eurozone over the 2006-2008 period and another two million jobs in the EU.

Meanwhile, annual inflation would stand at 2.2 percent this year before easing to 2.1 percent next year in the eurozone, slightly above the European Central Bank's preferred level of close to but less than two percent.

Core inflation, which excludes volatile items such as oil, would remain "subdued". The commission forecast that oil prices would average about 65.6 dollars a barrel this year before rising to 66.3 dollars in 2007 and 68.0 dollars in 2008.

While interest rate conditions would remain "benign", the commission sounded a note of caution about high household debt levels in some member states such as Spain, Ireland, the Netherlands and Portugal, which could be hit hard by higher interest rates.

However, government finances were proving to be stronger than expected thanks to booming tax revenues. The average public deficit in both the EU and eurozone was expected to stand at 2.0 percent of gross domestic product this year.

Nevertheless, the Czech Republic, Hungary, Italy, Portugal and Slovakia were on course for deficits this year greater than a limit of three percent of GDP allowed by the EU's fiscal rulebook.