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MARRAKESH, Morocco (Reuters) - An Islamist bombing of a cafe last year hurt trade for the snake charmers and trinket sellers who entice foreign tourists to Marrakesh's Jamaa el-Fna square, but the euro zone debt crisis risks doing far more lasting damage to business.
The square, a riot of colors, smells, music and commerce surrounded by the red walls of the old city, is a barometer of how Morocco's economy - heavily reliant on the foreign tourists who usually flock to the square - is performing.
The indications from traders, officials and tourists here are that visitors from Europe, preferring to hold onto their savings in the face of the financial crisis at home, are not coming in the same numbers as before.
"I know a lot of friends stopped travelling because of the crisis," said a French tourist who wished only to be known as Jean-Baptiste, who was strolling in the square recently with his wife, Mathilde.
Tourists from western Europe typically account for more than 70 percent of all visitors annually to Morocco, where total visitor numbers fell 10 percent in the first quarter of 2012 from a year earlier, according to official data.
The downturn in trade in Jamaa el-Fna square shows that while the euro zone crisis has its epicenter in places like Athens and Madrid, the tremors are being felt much further afield.
Morocco is vulnerable because Europe is its biggest trading partner and tourism is it biggest source of foreign currency - crucial to keeping its fragile balance of payments afloat - and accounts for up to 10 percent of gross domestic product.
Tourism is also the second-largest industry in terms of jobs, employing 400,000 in this country of 34 million, which is struggling to contain unemployment that has reached 33 percent among people under 35.
Citing the combined impact of the slowdown in Europe and a poor harvest, the government forecasts economic growth this year will slow to 3 percent, from close to 5 percent in 2011.
That risks further stoking social unrest in an already volatile country. Morocco rode out last year's Arab Spring without a revolution but did see months of mass protests that could recur if the economy worsens.
Jamaa el-Fna used to be the spot where the Marrakesh authorities would execute people. Now recognized by the United Nations as part of a World Heritage site, it is probably Morocco's most iconic tourist attraction.
Snake charmers and dancing monkeys compete for space in the square. At night people dine out on restaurant terraces while down below traditional musicians and dancers perform and local women cajole tourists to have elaborate patterns painted on their hands in henna.
The numbers of tourists visiting Jamaa el-Fna itself dropped 7 percent in the first quarter, according to Abdellatif Abouricha, the Moroccan government's chief tourism official for Marrakesh.
"The Argana bombing is almost forgotten, but the international financial crisis has had a slight impact on tourism activities on the square and the whole city," he said.
On April 28 last year, an Islamist militant who disguised himself as a guitar-carrying hippie, walked into a cafe in the square, the Argana, and planted two bombs that killed 17 people, mostly foreign tourists.
Hordes of foreign visitors swiftly canceled trips to Marrakesh, Morocco's top tourist destination.
"The months which followed the bombing were catastrophic," said Mohamed El-Baraka, 56, who sells books near Jamaa el-Fna.
When a Reuters reporter visited the square one evening in late May this year things seemed to be back to normal and it was heaving with Moroccan visitors and foreign tourists.
During the heat of the day, however, activity was much more subdued. There were few tourists about on the square, mainly because they preferred to stay in the cool of their air-conditioned hotels.
"The Argana bombing scared everybody, even me and I've been here for 30 years," said a 45 year-old seller of dried fruit who gave his name as Abdelghani.
"We are not used to those kinds of incidents, but I think it is forgotten now ... The square is starting to return to normal but still the incomes are low," he said.
Room rates in Marrakesh are the highest in the country but the average number of nights' stay per visitor at hotels in the city fell 15 percent in the first quarter year-on-year, according to the city's tourism office.
Government officials play down the challenges facing Moroccan tourism. Abouricha said the euro zone crisis, the Argana bombing, and the Arab Spring upheavals around the Middle East all weighed on tourism in Marrakesh, but the impact was "not catastrophic."
Tourism Minister Lahcen Haddad has predicted 2012 will be "a tough year," with a risk that tourist numbers in Morocco would fall, but he said revenues, which totaled $6.9 billion last year, should hold up, claiming those who did come were spending more.
Hassan, who sells orange juice from a stall on Jamaa el-Fna square, is far less confident.
"With the combined effect of the financial crisis and the Argana bombing on Jamaa el-Fna square, the prospects for tourism in the city are not looking good," he said.
Editing by Susan Fenton