BRUSSELS (Reuters) - Euro zone economic sentiment unexpectedly improved in July despite the deepening crisis between the West and Russia over Ukraine, data showed on Wednesday, and inflation expectations among consumers and companies edged up.
Consumer morale rose in three of the euro zone's five biggest economies, led by Italy and followed by France and the Netherlands, while the bloc's growth engine Germany and Spain saw sentiment worsening.
The monthly economic sentiment index for the 18 countries sharing the euro rose to 102.2 in July from a revised 102.1 in June. Economists surveyed by Reuters had forecast a drop to 101.8 in July.
Europe, following months of hesitations, agreed on Tuesday to broad economic sanctions on Russia - its third-biggest trading partner - targeting Moscow's energy, banking and defence sectors over Moscow's support for rebels in eastern Ukraine.
"It is highly likely that events in the Ukraine and heightened global geopolitical tensions are taking an increasing toll on confidence in some countries. This is clearly the case, for example, with business confidence in Germany," said Howard Archer, chief European economist at IHS.
"Furthermore, the introduction of increased sanctions against Russia could further impact on sentiment," he added.
While industry confidence rose on optimism about future production, confidence in the services sector declined as demand expectations weakened. Worries about jobs and the economic outlook meanwhile hit consumer confidence, the Commission said.
Consumers' inflation expectations improved marginally to 8.7 in July from 8.6 in June while companies' outlook for selling prices returned to positive territory in July for the first time in seven months.
Analysts warned of any complacency, adding improvement was mainly attributable to the industrial sector, which is likely to be most vulnerable to further economic sanctions.
"In that regard a genuine risk is that the economic fall-out of the crisis in Ukraine becomes the straw that breaks the camel’s back for the European recovery," said Peter Vanden Houte, the chief euro zone economist at ING.
The 9.6 trillion euro economy is still struggling to get onto a solid footing after exiting recession a year ago, with the European Union's toughening of sanctions against Russia adding to risks the fragile recovery could stall.
Last month, the European Central Bank launched broad measures to aid growth and avert deflation risks in the bloc, and said it could yet print money to support the economy.
Measures announced by Europe and the United States on Tuesday will target Russia's energy, banking and defence sectors in the strongest international action yet over Moscow's support for rebels in eastern Ukraine.
Separately, the Commission's business climate indicator, which points to the phase of the business cycle, fell to 0.17 in July from 0.21 in June, its worst reading since October 2013.
Data earlier on Wednesday showed Spain's economy grew at its fastest pace since before the financial crisis in the second quarter, although monthly consumer prices fell at their sharpest year-on-year rate in July since October 2009.
The Spanish inflation reading will be followed at 1200 GMT by corresponding numbers for Germany, the biggest economy in the euro zone. German inflation is forecast to have risen 0.2 percent month-on-month and 0.8 percent year-on-year in July.
Reporting by Martin Santa; Editing by Jeremy Gaunt