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Euro Zone Slows Down Sharply

Euro zone factory growth sank to its slowest pace in over two years in October, led by a sharp slowdown in Germany and a contraction in Spain, final figures from a key monthly survey showed on Friday.

The RBS/NTC Eurozone Manufacturing Purchasing Managers Index (PMI) was confirmed at 51.5, unmoved from the flash estimate and the consensus forecast and at its lowest since August 2005.

Germany saw its sharpest monthly slowdown since its survey started in early 1996, with its factory PMI falling more than three points to 51.7, still above the 50.0 mark that divides growth from contraction.

The Spanish factory PMI showed contraction, at 49.6, for the first time since June 2005.

Slower demand from within the euro zone as well as elsewhere, alongside a euro at all-time highs against the dollar were the principal factors holding back growth, the survey showed.

Financial markets and the euro showed minimal reaction to the unrevised data.

A German Story

"It's clearly a Germany story, much the same as Germany was the centre of attention in last month's services PMI weakness," said Mark Wall at Deutsche Bank.

"The fact that Germany is so weak means its surrounding neighbour countries are at risk."

The data support the majority view of economists, who see the European Central Bank keeping interest rates on hold through 2008.

It confirmed a western European trend indicated on Thursday when Britain's October manufacturing PMI came in at 52.9, down from 54.7 in September.

Euro zone manufacturing output growth sank to its slowest pace since August 2005 in October at 52.6, although this was a touch higher than the 52.5 reported for the flash estimate.

New orders and export orders indexes were also revised up 0.1 point each higher from the flash estimate to 50.7 and 51.4 respectively, though still at a level not seen since May 2005.

ECB Wait-and-See

Inflationary pressures also eased slightly in October, though remained at high levels, with the input prices index revised up to 59.0 from 58.9 but below September's 59.6.

Separately, the Economic Cycle Research Institute said its Eurozone Inflation Gauge, which aims to predict future inflation trends, rose to a fresh seven-year high in September.

"The ECB are in something of a bind, but that just keeps them firmly in wait-and-see territory," said Deutsche's Wall of the bank's problem in setting interest rates as inflation creeps up while growth slows.

The output prices index, still at its lowest since January 2006, was revised up to 53.2 from 53.1.

Official euro zone data showed inflation hit 2.6 percent in October, well above the 2.3 percent expected by economists, and the ECB's 2.0 percent ceiling.