The debt-ridden euro zone acted as a drag on the world economy at the start of the year and is seemingly destined to slide back into recession just as monetary policymakers are running out of ammunition.

Data from the euro zone's private sector published on Monday showed a sharp downturn among Italian and Spanish businesses dragged the currency bloc back into decline last month. Growth slowed in Germany, the region's biggest and strongest economy, and stalled in France.

The European data followed slightly more upbeat purchasing managers' indexes (PMIs) from Asia, with China services growth picking up and India's slowing, but maintaining a robust pace.

While central bankers in Asia have interest rates to cut, policy rates are at or near zero in most of the developed world and while the euro sovereign debt crisis may now be containable, it is far from resolved.

It will put a dent in hopes that Q4's contraction was a one-off for the euro zone as a whole but the most worrying development is the continued weakness of the southern European measures, said Ben May at Capital Economics.

The ECB is going to be setting policy for the region as a whole and not for individual economies and it is likely that policy is going to be less accommodative than say Spain or Italy would choose.

The European Central Bank pumped 530 billion euros of cash into the banking system last week in the second of two 3-year money auctions, but there is not much evidence yet the money is finding its way into the real economy although Spanish and Italian borrowing costs have tumbled.

Latest figures showed banks deposited over 820 billion euros overnight at the ECB.

Markit's Eurozone Composite PMI, which gauges private sector activity across the economy, slipped to 49.3 in February, revised down from a preliminary reading of 49.7 and below January's reading of 50.4.

The composite PMI is a good proxy for overall growth. A reading below 50 denotes contraction, meaning Europe's private sector economy has been stuck in a modest decline for five of the last six months.

The euro zone economy contracted by 0.3 percent in the last quarter of 2011 and the European Commission forecasts it will shrink by the same amount this year.

Today's PMI surveys don't bode well for the euro zone economy as a whole as a mild recession is well in the cards, said Annalisa Piazza at Newedge.

Britain's services sector, closely linked to the euro zone, grew less than expected last month, but still suggests the economy remains on a slow recovery path.

In Asia, China's service sector picked up pace, although it was still below its long term trend, while in India the sector lost momentum, shedding workers.

Data due at 1500 GMT are expected to show service sector growth also cooled in the United States after a disappointingly weak performance in manufacturing reported last week.


A Reuters poll suggested the euro zone will languish in a downturn until the second half of this year.

However, the ECB and Bank of England have slashed their interest rates to record lows and are now expected to wait and see if the hundreds of billions of euros and pounds pumped into the financial sector over the last few months helps.

Both central banks have policy meetings this week and are expected to leave policy unchanged.

The U.S. Federal Reserve for its part has pledged to keep rates at near-zero for the next two years but another round of government bond purchases with new money is much less certain.

Many analysts expect China's central bank to continue its steady policy easing by cutting the amount of cash that banks must hold in reserve to crank up credit.

China announced a 50 basis point cut in its reserve requirement ratio to 20.5 percent on February 18, releasing about 400 billion yuan that could be used for bank lending. It was the second 50 basis point cut in the RRR in three months.

Chinese Premier Wen Jiabao set an economic growth target of 7.5 percent for 2012 earlier on Monday, lower than the longstanding annual goal of 8 percent.

The premier named expanding consumer demand as his first priority for 2012, raising expectations that China will suck in more goods from the rest of the world, something its G20 peers have urged it to do to help rebalance the world economy.