Markets bounce despite new eurozone recession warning

Markets across Europe recovered from early losses on Thursday despite a new warning from the EU Commission that the eurozone may fall into recession next year.

The latest forecasts, released this morning, predict that the eurozone economy will grow by just 0.5% in 2012, a sharp reduction from an estimate of 1.5% six months ago.

Olli Rehn, the EU's vice president for economic and monetary affairs, said although the EC did not expect a recession, the "unusually high uncertainty" around key policy decisions and the probability of a longer period of stagnation meant it could not be ruled out.

"Growth has stalled in Europe, and there is a risk of a new recession," he said.

Even if the eurozone as a whole avoids recession next year, many of its members nations are going to suffer painful contractions, he added.

But the warning does not appear to have worsened investor confidence across Europe.

In early trading on Thursday, major indices in the UK, Germany and France, as well as in Asia and the US overnight Wednesday, were sharply lower after Italian ten-year bond yields hit crisis levels.

But the resumation of talks between leaders in Greece - who hope to create a coalition government - and apparent progress in Italy over creating an interim government to replace Silvio Berlusconi helped markets recover.

London's FTSE was 24 points lower at 5,436 by mid-morning Thursday having earlier been down almost 2%.

Meanwhile, indices in France and Germany, which had been in the red, were marginally higher by 10.30am.