BRUSSELS/BERLIN (Reuters) - Germany pulled the euro zone's economy back from the brink of recession at the start of 2012 but stagnation in France and contraction in southern Europe underlined sharply differing fortunes in a bloc laboring under the effects of austerity.
Overall gross domestic product was unchanged in the first quarter following a dip at the end of last year, data showed on Tuesday, meaning that the euro zone missed slipping officially into recession by the narrowest possible margin.
But a surprisingly strong showing from Germany, whose exporters are helping it to cope with the euro zone crisis, flattered dismal performances in most of the other major economies.
"Germany is leading the bloc, but this doesn't mean we will have a strong rebound. Austerity is not going away and southern European economies are really struggling," said Mads Koefoed, a senior economist at Saxo Bank. "We are looking at stagnation to very mild growth in the year to come."
Most euro zone governments are imposing austerity policies, often at great cost to their electorates and the chances of economic growth, hoping to counter the debt crisis by cutting their budget deficits. However, new French President Francois Hollande is heading to Berlin on Tuesday to argue for adding measures to boost growth to the formula.
Tuesday's data showed a two-speed euro zone, with Italy's recession deeper than feared and Greece suffering something akin to a depression.
"There's a growing divergence in the euro zone, with particularly sharp contractions in the peripheral countries that need to do the most structural reforms, while Germany is the outperformer," said Joost Beaumont at ABN Amro in Amsterdam.
GDP in Germany, Europe's biggest economy, rose 0.5 percent on the quarter, confounding expectations of a more modest rise and lifting the rest of the 17-nation currency bloc.
While the euro zone's stagnation offered little cheer, it was still better than the 0.2 percent contraction most economists had expected. Two successive quarters of falling GDP would have marked the second recession since 2009.
Germany's strong showing initially bolstered markets which were battered on Monday by growing fears that Greece will deepen the crisis by leaving the euro zone.
The FTSEurofirst of top European shares climbed in response, safe haven German government bond futures dipped and the euro recovered some poise.
But even in Germany, the crisis is holding back a true revival, and analyst and investor sentiment fell sharply in May, separate figures showed. That ended a run of strong data for the economy as political uncertainty took its toll on confidence.
Germany's biggest steelmaker, ThyssenKrupp, also said on Tuesday there was no sign of a quick recovery in Europe after the steel industry operated at reduced capacity in recent months due to weak demand and sliding prices.
"The euro zone crisis has returned to investors' attention with the banking troubles in Spain and political instability in Greece," said Christian Schulz at Berenberg Bank.
France, the euro zone's second largest economy, reported no expansion in the first quarter, unwelcome news for Hollande as he was inaugurated in the Elysee Palace in Paris on Tuesday.
"There was no good surprise," said Philippe Waechter, chief economist at Natixis Asset Management of the French data. "There was weak consumption, no investment."
Hollande, who is due to attend his first EU summit in Brussels next week, said he would urge his peers to back a pact that coupled the goals of deficit reduction with economic stimulus. But Italy's weaker-than-expected output epitomized southern Europe's anemic economies.
Italy's heavily indebted economy shrank more than expected in the first quarter, with GDP falling 0.8 percent and marking the third consecutive quarter contraction.
After a decade of falling productivity in Italy, the debt crisis has highlighted how barriers to competition, heavy regulation and bureaucracy are dragging on the economy, discouraging investment and prosperity.
Data two weeks ago showed Spain, which is struggling to reduce a huge deficit and rebuild its banking sector following a burst property bubble, is already in recession, after GDP shrank 0.3 percent in the first quarter.
Even in the wealthy Netherlands, economic output contracted for a third consecutive quarter, shrinking 0.2 percent in the first quarter of 2012 compared with the previous three months, underscoring just how damaging the crisis has become.
Greece, still without a government nine days after elections as its political parties argue about whether to rip up its bailout program, is in its fifth consecutive year of recession, which is tantamount to a depression.
Greek GDP contracted 6.2 percent year-on-year in the first quarter of 2012.
EU leaders have been unable to find a way back to growth, while many southern Europeans are turning against the austerity measures, holding huge street protests in Madrid and backing radical political parties in the Greek elections.
Hollande wants new growth measures and while German Chancellor Angela Merkel has not disagreed in principle, she is unlikely to accept anything that pushes government debt up further.
Italian Prime Minister Mario Monti is also pressing for a growth strategy. He won support from an unlikely source when credit ratings agency Moody's sharply downgraded 26 Italian banks, saying budget-cutting measures and an Italian recession had hit demand and increased the level of bad loans.
A hefty defeat for Merkel's conservatives in a German state election on Sunday, meted out by the Social Democrats who have argued against austerity for austerity's stake, will add to the pressure on the chancellor.
Additional reporting by Daniel Flynn in Paris and Maria Sheahan in Frankfurt; Writing by Mike Peacock and Robin Emmott; Editing by Jeremy Gaunt and David Stamp