Euro zone sentiment falls, recovery losing steam

European flags are seen outside the European Commission headquarters in Brussels June 30, 2010.

BRUSSELS (Reuters) - Euro zone economic sentiment fell more than expected in May with optimism declining in all business sectors, signalling the economic recovery was losing momentum after a strong first quarter.

The European Commission said economic sentiment in the 17 countries using the euro fell to 105.5 in May from a downwardly revised 106.1 in April. Economists polled by Reuters had expected a decline to 105.7.

"The slowdown of global activity and the effect of the Japanese events are likely behind May's slowdown," said Clemente de Lucia, economist at BNP Paribas.

Sentiment fell in industry, services, the retail sector and in construction, but improved for the first time since February among households, to -9.8 from -11.6.

"Following a strong start, the euro-area economy looks set (to grow) at a markedly slower pace during the remainder of the year," said Christoph Weil, economist at Commerzbank.

"We believe that, in comparison to the first three months of the year, GDP growth will halve in the second quarter, to 0.4 percent quarter-on-quarter," he said.

The Commission also said selling-price expectations in the manufacturing sector fell to 19.8 in May from a downwardly revised 21.3 in April, signalling an easing of inflationary pressures early in the pipeline.

Inflation expectations among consumers also fell to 27.4 in May from 30.7 in April, in what is likely to be a reaction to the European Central Bank's interest rate rise in April and expectations that borrowing costs would rise even higher.

"The easing back in consumers' inflation expectations is welcome news for the ECB, although the bank will note that the index is still above its long-term average," said Howard Archer, economist at IHS Global Insight.

"The ECB will also be pleased to see that pricing expectations moderated among manufacturers, service companies and construction companies, although they rose among retailers."

(Reporting by Jan Strupczewski, editing by Rex Merrifield and Catherine Evans)