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Greek economy 'to shrink by 3% this year'

The European Commission has said it expects the Greek economy to shrink by 3% this year, amid continued market jitters over the country's debt crisis.

The euro hit a fresh 13-month low against the dollar and European stock markets were also hit amid concerns over Greek bail-out plans.

There are also fears Greece's debt crisis could spread to other countries.

Ratings agency Fitch said it was considering a downgrade of Portugal's government debt.

Bond yields

Fellow ratings agency Moody's Investor Services said it would be reviewing Portugal's bond rating, which could lead to a possible downgrade.

There are fears that Portugal, like Greece, may also have trouble repaying debt and that they may have to call on eurozone loans.

However, ratings agency owngrades could make it more expensive for Portugal to borrow money.

On Wednesday the interest rates that Greece, Portugal and Spain would have to offer to raise new money on bond markets widened..

The yield on the 10-year Greek sovereign bond rose to 10.025% from 9.168% on Tuesday, and that of Portuguese 10-year bonds went to 5.762% from 5.386%.

The rate on Spain's 10-year sovereign bond widened to 4.196% from 4.113%.

'High uncertainty'

Meanwhile, plans for austerity measures in Greece - seen by eurozone members as a crucial condition of the bail-out - have been met with violent protests in Athens.

At least three people were killed in the Greek capital when protesters set fire to a bank during a general strike over the planned measures.

In its annual spring economic forecast, the commission said the eurozone as a whole would see growth of 0.9% - an improvement on the 0.7% forecast earlier this year.

But it admitted that the recovery in Europe "continues to be surrounded by high uncertainty".

The commission cited "recent tensions" in the markets as a concern.

The euro hit its lowest level against the dollar in more than a year, at $1.2887, and was also down against the pound, with one pound worth 1.1706 euros.

Stock markets across Europe fell further following steep declines on Tuesday. In London the FTSE 100 closed down 1.28%, France's Cac 40 index dropped 1.44%, and Germany's Dax down 0.81%.

At close in the US the Dow Jones was down by 59.94 points, or 0.55%, at 10,866.83.

The tech-based Nasdaq fell by 0.91% to 2402.29, and the broader S&P 500 fell by 0.8%, to 1,164.18.

Bail-out doubts

"This is the most severe crisis Europe has faced in decades," said Julian Callow, chief Europe economist at Barclays Capital.

"The problem is no one has a clear idea of how we're going to get out of this situation."

Portugal's economy is forecast to grow by 0.5% after shrinking by 2.7% last year, the European Commission said.

Spain - another country under scrutiny from investors - is expected to see its economy shrink by 0.4% this year, which is better than the 0.6% fall in GDP previously forecast.

Image caption The economic crisis has prompted angry demonstrations in Greece

At the weekend, European finance ministers agreed a 110bn-euro ($143bn; £95bn) bail-out package for Greece, to help it pay off its huge debts.

But the deal still requires the approval of several EU states and faces opposition among the Greek public.

German Chancellor Angela Merkel was forced to defend her country's involvement in the rescue package in a statement to parliament on Wednesday.

She warned lawmakers that "the future of the European Union" and Germany's participation in it was at stake.

Contagion fears

Greece is currently struggling with debts equivalent to more than 100% of its GDP.

Azad Zangana, European economist at Schroders, said the fear was that letting Greece default on its debts could ripple through the whole eurozone, with disastrous effects.

"If the [Greek rescue package] isn't agreed, Greece is bankrupt. Its as simple as that," he told the BBC.

"That would ripple though into a catastrophic default situation, that would then feed through into higher borrowing costs for the likes of Portugal, Spain and Ireland."

That, he warned, could even mean the eventual break-up of the eurozone

In a French newspaper interview, the head of the International Monetary Fund, Dominique Strauss-Kahn, also admitted concern over the possible spread of the crisis.

"We have to succeed in avoiding contagion... we should remain vigilant," he told Le Parisien.

In a Brussels news conference, EU economic and monetary affairs commissioner Olli Rehn stressed that Greece was "a unique and particular case", but said swift action to contain the crisis was needed.

"It is absolutely essential to contain the bush fire in Greece so that it will not become a forest fire and a threat to financial stability for the European Union and its economy as a whole," he said.

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