A gloomy assessment of the business climate in Germany kept European shares under pressure on Monday, but moves were capped ahead of a meeting of central bankers at the end of the week which could point toward fresh stimulus measures.
The latest Ifo index, which is compiled from a survey of some 7,000 German firms on economic conditions, fell in August to its lowest level since March 2010 as the euro zone crisis and a slowdown in China took their toll.
"It looks as if the German economy will, at best, be treading water in the coming months," Carsten Brzeski, senior economist at ING.
The euro zone's blue chip Euro STOXX 50 index was down about 0.1 percent after the Ifo data at 2,431.10 points, although volumes were thin as the British market, Europe's largest, was shut for a public holiday.
The main German stock index was little changed, recovering some of its earlier losses, as some of the Ifo institute's findings were not as bad as many feared.
The euro also rose to $1.2530 after the Ifo survey was released, up 0.15 percent on the day, but was holding below a peak of $1.2590 set last Thursday.
Analysts said the weaker outlook in Europe's biggest economy could also support political efforts to find a solution to the region's fiscal crisis, in part by supporting arguments made by German Chancellor Angela Merkel and European Central Bank President Mario Draghi.
"The declining growth rate in Germany shows that the country is not immune from the general slowdown in Europe and outside Europe," said BNP Paribas economist Dominique Barbet.
"This could help Merkel and Draghi convince German people that more efforts to support the euro zone are necessary and are in the interest of Germany."
TIGHT RANGES SEEN
But risk assets were expected to stay in a tight range this week as investors watch for clues on the next steps to tackle the euro area's debt crisis, and wait to see what emerges from a key gathering of central bankers at Jackson Hole, Wyoming on Friday.
ECB chief Draghi signalled earlier this month that the bank may start buying government debt to reduce crippling Spanish and Italian borrowing costs, comments that fuelled a broad-based upturn in sentiment on global markets.
However, over the weekend the powerful German Bundesbank chief Jens Weidmann likened the ECB's bond-buying plans to a dangerous drug, pointing to mounting unease over the policy.
Markets have also been unsettled by rising talk of a Greek euro zone exit which have bubbled up again in recent days
With the ECB's next policy meeting not until Sept. 6, most attention is now on Friday's central bankers meeting, and a speech that day by U.S. Federal Reserve chairman Ben Bernanke.
Talk of more accommodative monetary stance from the Fed has grown in the wake of data showing the U.S. economy struggling under the twin impact of the euro zone crisis and a slowing Chinese economy.
The speculation has helped the FTSEurofirst 300 index of top European shares rise by about 7 percent in August, while the S&P 500 index is up around 2.3 percent.
On Monday, gold was at its loftiest levels since mid-April, at around $1,676.45 an ounce, due to the strength of the view that a further monetary easing from the Fed is imminent.
Oil has also risen sharply, with Brent climbing above $115 per barrel on Monday, although it was also given a lift from supply concerns as Tropical Storm Isaac threatened to interrupt most U.S. offshore oil production in the Gulf of Mexico.