Brussels - Italy plunged into recession at the start of 2005, figures showed yesterday , casting a fresh shadow over the eurozone's economic outlook and taking the gloss off an unexpectedly strong performance by Germany.

Italian gross domestic product fell by 0.5 per cent in the first quarter, after a 0.4 per cent drop in the previous three months. A recession is usually defined as two successive negative quarters. The abrupt decline is a significant setback for Silvio Berlusconi, Italy's prime minister, and his chances of winning re-election in the national poll due by May 2006.

Italy's recession is one of the deepest witnessed by a member of the eurozone since the launch of the euro in 1999. It comes amid fears that the region as a whole is slowing further in the second quarter, hit by high oil prices and the euro's appreciation late last year.

Joaquín Almunia, the European monetary affairs commissioner, told the Financial Times that he was "moderately optimistic" about the outlook for the eurozone economy for the rest of 2005, especially if oil prices remained at current levels. But he admitted: "We have a problem of confidence."

Italy's data came as the European Central Bank sounded a warning about persistent differences in economic growth across the eurozone, although its monthly bulletin put the emphasis on structural reform by national governments to smooth out variations. Overall eurozone GDP rose by 0.5 per cent in the first quarter, after just 0.2 per cent in the previous three months. The Netherlands also fell into recession in the first quarter while France, which releases GDP figures next week, is thought to have seen a substantial slowdown.

By contrast, Spain is thought to have grown by as much as 0.8 per cent.

Germany saw an unexpectedly strong rise of 1.0 per cent - its fastest quarterly rise for four years.

Although Germany seemed to have passed the "sick man of Europe" title to Italy, economists warned its growth rate was almost certainly a blip, after a particularly weak previous quarter.

Mr Almunia will exacerbate Mr Berlusconi's political problems by demanding that he takes action to bring down the country's rising budget deficit. The commissioner believes Italy broke the stability and growth pact's 3 per cent of GDP deficit ceiling in 2004 and will do so again in 2005, leaving him no alternative but to launch proceedings against Rome.

Mr Almunia said such action would be "an opportunity to show that the stability and growth pact still exists" after its rules were made more flexible in March. He said he hoped EU member states would back the Commission's demand that Mr Berlusconi should cut the deficit.