The eurozone economy is expected to slow down more sharply than previously expected this year, with inflation on the rise, the European Commission said on Thursday.

The combined economy of the 15-nation bloc sharing the same currency will grow by 1.8 percent this year, revised down by 0.4 percentage points from a previous forecast in November and against a 2.7-percent expansion in 2007, the commission said.

Economic growth in the EU is also expected to slow to 2.0 percent this year, down from 2.9 percent in 2007. The commission had expected 2.4-percent growth for the EU in 2008.

The commission said the slowdown is due to the fact that some of the downside risks, namely the ongoing financial turmoil, a sharp slowdown in the U.S. and high commodity prices, have materialized.

Following the strong rise in food and energy prices, inflation in the eurozone is expected to average 2.6 percent this year, 0.5 percentage points more than the previous forecast by the commission.

It would breach the 2-percent ceiling preferred by the European Central Bank (ECB) to maintain price stability.

But the commission said inflation was expected to return to more normal levels in the last quarter of 2008.

"Europe clearly begins to feel the impact of the global headwinds in terms of lower growth and higher inflation," said Joaquin Almunia, EU Economic and Monetary Affairs Commissioner.

With financial turmoil lingering on, fears of the U.S. economy falling into recession and oil prices touching 100 U.S. dollars per barrel, the commission said the global economic situation and outlook remained unusually uncertain at the start of 2008.

Though the European economies were generally sound ahead of the recent turbulence, the data for the fourth quarter of 2007 pointed to a certain moderation of activity, arising from the impact of both a tightening of credit conditions and a slump in the United States, causing a slowdown in global growth.

In the last quarter of 2007, the eurozone and the EU economy grew by 0.4 percent and 0.5 percent quarter on quarter respectively, both slowing down from 0.8 percent in the previous three months.

Around half a year after the outbreak of the U.S. sub-prime mortgage market crisis, which triggered the ongoing turbulence on the world's major financial markets, the re-pricing of risk is not over yet. As a result, conditions in the international financial system are fragile, as the functioning of several segments of the credit markets has been impaired.

Meanwhile, the high oil and commodities prices are also taking their toll on the real economy.

However, Almunia said the European economy could manage to get through the current difficulties.

"Its increased resilience, thanks to the reforms already carried out, together with sound fundamentals, do help weather the storm," Almunia said. "Past efforts to achieve budgetary balance or surpluses also pay off as automatic stabilizers can now play their full role in most cases."

"We are not in a stagnation situation, we are living in an environment of less growth and more inflation," he added.

The commission said quarterly figures indicated a certain acceleration in the second half of 2008, however, with the assumption of a rapid upturn in the U.S. economy spurred by the sizeable monetary and fiscal easing, together with a gradual normalization of financial markets.

Higher inflation, which jumped to a record high of 3.2 percent in January, threw the ECB into a dilemma as to whether to raise its benchmark interest rate for the eurozone to maintain price stability since any further increase might be detrimental to the economic growth amid the financial turmoil.

Analysts expected the Frankfurt-based ECB would start cutting rates in the second quarter of this year from the current 4.0 percent to 3.5 percent by the year's end.

The commission said the risks to the inflation outlook appear more balanced, but are still on the up, with the increase in inflation expectations being a particular source of concern.

Economic growth in Germany, the EU's largest economy, was revised down from 2.1 percent in November to 1.6 percent, with high inflation denting consumer confidence.

France would see its economic growth slow to 1.7 percent from 2.0 percent as previously expected.

Italy, Europe's fourth-largest economy, is now predicted to grow at 0.7 percent, nearly halved from the previous forecast.