By Robin Emmott
BRUSSELS (Reuters) - Confidence in the euro zone's economy fell further in April, data showed, strengthening the case for a cut in interest rates this week by the European Central Bank.
The euro zone is facing a difficult road out of recession and has seen a souring of the mood among companies and consumers since March, after an optimistic start to the year was disrupted by turmoil in Cyprus and Italy.
Morale in the 17-country bloc slipped 1.5 percentage points to 88.6, the European Commission said on Monday - worse than the decline to 89.3 expected by economists polled by Reuters.
"We are reaching a trough and the market is betting on the ECB cutting rates to lift the economy," said Steen Jakobsen, chief economist at Saxo Bank. "But lower interests won't solve the euro zone's problems, we need structural reforms and for businesses to invest again."
Pessimism set in even in Germany, which has performed better than most during the crisis, with economic sentiment there worsening by 2.3 points. Morale also fell in France and Italy, meaning the euro zone's three largest economies are all witnessing a marked decline in the confidence that is crucial in getting the output in the euro zone growing again.
Confidence fell across the region from industry to retail trade, and sentiment in services fell 4.1 percentage points.
The Commission's measure of the euro zone's business cycle decreased 0.18 points to -0.93, lower than the -0.89 level expected by economists.
Many expect the ECB to cut interest rates to lower the cost of borrowing and help improve morale.
A majority of economists expect a 25 basis point cut this Thursday, according to a Reuters poll last week, to take the bank's main refinancing rate to a record low of 0.5 percent.
RATE CUTS, LESS AUSTERITY
Germany's economic resilience and reforms in southern Europe sowed hope early this year that the bloc could pull out of recession before the end of 2013, but a messy bailout in Cyprus and Italy's inconclusive February election, which failed to yield a government until late April, have weighed on confidence.
France's weak economy and public accounts are also a concern.
Meanwhile, budget cuts have been at the centre of the euro zone's strategy to overcome a three-year public debt crisis but they are also blamed for a damaging cycle where governments cut back, companies lay off staff, Europeans buy less and young people have little hope of finding a job.
Crippling levels of unemployment and outbreaks of violence in southern Europe are now forcing a rethink, but there is division on just how far to soften the targets.
"If the ECB eases monetary policy and the European Commission engineers a slower pace of fiscal consolidation, the euro zone economy may still exit from recession later this year," Martin van Vliet, an economist at ING.
"But the fragility of confidence suggests that any economic recovery would likely be slow, and largely confided to the core countries," he said.
Spain, the euro zone's fourth largest economy, said last week its economy would shrink more than initially expected this year and its budget deficit would be higher than promised.
Growth should return next year, and economic sentiment improved by almost 1 point, the Commission said, in a sign that despite record unemployment, reforms may be helping business.
(Reporting by Robin Emmott; editing by Rex Merrifield and Toby Chopra)