(BRUSSELS) - European economic confidence slumped in July at the fastest pace since just after the September 11, 2001 attacks in the United States, according to a widely watched EU survey on Wednesday.

Facing record inflation and higher interest rates, consumers and executives' confidence in the economic outlook posted the biggest monthly decline since October 2001, the European Commission said.

"The eurozone economy has fallen into semi-stagnation," said Bank of America economist Holger Schmieding. "The risk of a recession later this year is no longer negligible."

"This is the clear message from the broad-based plunge in the EU commission's sentiment survey," he added.

Following in the path of other recent weak data, the commission's eurozone economic sentiment indicator plunged to 89.5 points from a revised 94.8 points in June.

The fall, which brought the index to its lowest point since March 2003, was also worse than economists expectations for a decline to 93 points, as polled by Dow Jones Newswires.

Meanwhile, confidence in the economy of the broader 27-nation EU also retreated to the lowest since March 2003, tumbling to 88.7 points in July from 94.5 in June, the survey showed.

A slump in consumer confidence drove the weakness in both the eurozone and the EU, along with negative sentiment in the construction sector which is struggling to cope with retreating demand and high interest rates.

Economist Jennifer McKeown at consultants Capital Economics said that "with consumer confidence falling again, there seems little chance that stronger domestic spending will pick up the slack" of weaker manufacturing activity.

While almost all countries saw weakening economic confidence, the drop was particularly strong in Italy and Britain but Germany and France also saw sharp falls.

The European Commission's separate monthly business climate indicator for the eurozone also declined below its long-term average, dropping to a negative 0.21 points in July from a plus 0.13 in June.

"Business and consumer confidence is being pummeled by a myriad of factors," said economist Howard Archer at consultants Global Insight.

"These notably include elevated energy and food prices, the ongoing credit crunch and financial market turmoil, the very strong euro, the ECB's raising of interest rates in July and fears that it could tighten monetary policy further," he added.

Despite the worsening growth outlook, the European Central Bank raised its key interest rate to 4.25 percent this month to keep a check on eurozone inflation, which hit a record 4.0 percent in June.

Although eurozone figures due on Thursday are forecast to show that inflation edged higher in July to 4.1 percent, economists said that the rapidly deteriorating growth outlook would discourage the ECB from making further rate hikes.

"If activity slows as the survey suggests, inflation worries must give way to anxiety over weakness in the real economy," Capital Economics' McKeown said.

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