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LONDON (Reuters) - The euro and shares fell sharply on Thursday after data showed the euro zone's two biggest economies shrank even more than expected late last year, throwing a first quarter regional recovery into doubt.
The German economy contracted 0.6 percent in the final quarter of 2012, marking its worst performance since the global financial crisis was raging in 2009. Exports, normally the motor of its economy, did most of the damage.
Overall the euro zone's 17-country economy shrank 0.6 percent, with France's 0.3 percent fall slightly worse than forecast.
Germany is expected to rebound but the figures suggest the bloc as a whole could remain in recession in the first quarter of this year, despite a recent jump in market sentiment as fears that the currency bloc could fall apart faded.
"These are horrible numbers. It's a widespread contraction, which does not match this positive picture of stabilization and positive contagion," said Carsten Brzeski, an economist at ING.
The data pushed the euro down 0.9 percent to $1.3324, its lowest in three weeks. European shares likewise fell, with Frankfurt .GDAXI and Milan .FTMIB losing more than 1 percent. Paris .FCHI and London .FTSE also suffered heavy drops, and the FTSEurofirst 300 index was 0.4 percent lower.
"We still expect growth to return in the course of 2013 but any return of growth will be very small which means that the social impact of this recession, especially in the peripheral countries, will be still a very severe one," Brzeski added.
German bonds rose as demand for traditional safe-haven assets returned. Bund futures were 55 ticks higher on the day at 142.60, having extended gains after Italian GDP figures also came in weak.
Italy, which holds parliamentary elections in just over a week, suffered its sixth successive quarterly fall in GDP - this time a sharp 0.9 percent - putting it into a longer recession than it suffered during the crisis of 2008/2009.
Italian bond yields rose 3 basis points on the day to 4.42 percent while those on the Spanish equivalent were 2.5 basis points higher at 5.23 percent.
U.S. stock index futures also pointed to a lower open on Wall Street when trading resumes. .N
While European shares are down almost 1.5 percent since late January, the U.S. S&P 500 .SPX index hit a five-year high this week, underscoring the better growth forecasts for the world's largest economy.
Data from the European Central Bank also weighed on Europe as one of its quarterly surveys showed professional forecasters now see no growth in the euro zone this year, having last quarter expected a modest 0.3 percent rise.
The pain is not just in Europe. Japan - under pressure over its aggressive monetary and fiscal policies which are driving down the yen - reported earlier that its GDP shrank 0.1 percent in the fourth quarter, leaving it in recession and crushing expectations of a modest return to growth.
The yen steadied after swinging wildly this week following a muddled warning on currencies from the G7 nations on Tuesday. It slipped against the dollar but gained on the euro after the Bank of Japan announced, as expected, that it would keep the pace of asset purchases and interest rates unchanged.
The dollar traded at 93.35 yen, roughly flat on the day and off its recent lows of 92.83 yen but still well below a 33-month high of 94.46 set on Monday. The euro was down 0.8 percent at 124.50 yen.
The yen's recent rapid depreciation, after years of sharp appreciation, has drawn some criticism from overseas, with rhetoric heating up before a Group of 20 nations meeting on Friday and Saturday in Moscow.
"Usually the BOJ doing nothing causes a bit of disappointment, but since there are concerns about the flak Japan might get at the G20 this weekend for the weakening yen, standing pat will actually be a relief to the market," said Masayuki Doshida, senior market analyst at Rakuten Securities.
In commodity markets, oil prices dropped back under $118 a barrel after the GDP data from the euro zone, although the falls were limited by fresh tensions over Iran's nuclear program.
The United Nations nuclear watchdog said it had again failed to clinch a deal in talks with Iran on investigating the country's nuclear program.
"All the discussions about Iran are keeping oil high while it looks like China and the U.S. are growing, which is further supporting prices," Thorbjoern Bak Jensen, analyst at Copenhagen-based Global Risk Management, said.
Markets in China and Taiwan remain shut for the Lunar New Year holiday but Hong Kong resumed trading on Thursday. Metals markets were quiet as a result. Copper hit a 4-month high of $8,346 a tonne on February 4, but has since struggled to find momentum with the Shanghai Futures Exchange closed this week.
Gold, which has been at five-week lows this week, regained some strength, holding at $1,642.50 an ounce as recent losses started to draw buying interest.
Additional reporting by Marc Jones; Editing by David Stamp