Euro-area services and manufacturing output contracted more thaninitially estimated in August, adding to signs the economy hasslipped into a recession.

A composite index based on a survey of purchasing managers inboth industries in the 17-nation euro area fell to 46.3 from 46.5in July, London-based Markit Economics said today. That's below aninitial estimate of 46.6 published on Aug. 23. A reading below 50indicates contraction.

Europe's economy probably entered its first recession in threeyears in the second quarter as governments stepped up spending cutsto plug budget gaps, undermining consumer and export demand.Euro-area economic confidence dropped more than economists forecastin August and German unemployment increased, adding to signs of adeepening slump as the European Central Bank prepares for itsmonthly meeting tomorrow.

Indicators suggest that “the euro zone is headed for furthergross domestic product contraction in the third quarter,” saidHoward Archer, chief European economist at IHS Global Insight inLondon. “Ongoing serious euro-zone sovereign debt problems aremagnifying the problems by weighing down on already weak andfragile business and consumer confidence and adding to uncertaintyabout the outlook.”

The euro traded at $1.2523 10:05 a.m. in Brussels, down 0.3percent on the day. It has gained 1.1 percent against the dollarover the past three months, paring annual losses to 3.1percent.

An indicator of services output slipped to 47.2 from 47.9,today's report showed. A gauge of euro-area manufacturing rose to45.1 from 44 in July.

Investors are looking for ECB President Mario Draghi to unveildetails of a bond-purchase program at tomorrow's meeting to helpcounter the region's fiscal crisis. The Frankfurt-based centralbank has said it's ready to help distressed nations as long as theyrequest aid from Europe's bailout facility first.

Italy's Prime Minister Mario Monti told Il Sole 24 Ore in aninterview published on Aug. 29 that the government's austeritymeasures are starting to offset market concerns and that thecountry doesn't need to tap the rescue funds at the moment. Spain,with the region's third-largest deficit, also hasn't asked forsupport beyond the 100 billion euros ($125 billion) pledged for itsbanks.

'High Expectations'

Stefan Keitel, global chief investment officer at Credit SuisseAsset Management Ltd., told Maryam Nemazee on BloombergTelevision's “The Pulse” on Sept. 3 that “it's only a matter oftime” before the ECB starts buying Spanish government debt.

“With regards to the ECB meeting, expectations are pretty high,”Keitel said in the interview from Frankfurt. Draghi “will againphrase that he will do everything he can do keep the situationunder control, that the euro is irreversible, and he also made avery clear statement that if it's necessary, he will be able to buySpanish and Italian bonds. So far he had not been successful withconventional monetary policy to get the situation in the peripheryunder control.”

Governments may find it more difficult to raise additionalrevenues with at least five euro nations already in recession andthe crisis spreading from the periphery to core countries. InGermany, Europe's largest economy, business confidence fell for afourth straight month in August and investors also grew morepessimistic.

Euro-area retail sales probably fell 0.2 percent in July fromthe previous month, when they advanced 0.2 percent, a Bloombergsurvey shows. The European Union's statistics office in Luxembourgwill release the report at 11 a.m. today.

Siemens AG, Europe's largest engineering company, on Aug. 27intensified a push to lower costs and announced 500 job cuts at thebusiness making mechanical drives. Chief Executive Officer PeterLoescher has cut his profit target once this year and said in Julythat the lower goal will also be a stretch as demand dwindles fromChina and Europe grapples with the crisis.

The ECB will publish its latest economic projections tomorrow.The central bank in June forecast the economy to shrink 0.1 percentthis year, before expanding 1 percent in 2013. ECB council memberEwald Nowotny has said that it's likely that policy makers willlower the economic estimates.

IHS Global Insight's Archer said he expects the ECB to lowerborrowing costs by 25 basis points to 0.5 percent by October.

“A move is very possible as soon as its September meeting,” hesaid. “Even more important though will be the ECB fleshing out itsbond-buying strategy in a way that satisfies the markets.”

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