BRUSSELS: The EU economy will contract 4.0 percent this year as a worse-than-expected recession drives unemployment to levels not seen since World War II, the European Commission warned on Monday.

The estimate marked a dramatic downgrade of the European economic outlook after the EU's executive Commission forecast just three months ago that the eurozone economy would shrink only 1.9 percent and the EU economy 1.8 percent.

"The European economy is in the midst of its deepest and most widespread recession in the post-war era," EU Economic and Monetary Affairs Commissioner Joaquin Almunia said.

The chairman of the Eurogroup of eurozone finance ministers, Jea-Claude Juncker warned that the economic and financial crisis risked morphing into a social crisis if politicians failed to respond to surging unemployment.

"We are in the heart of an economic and financial crisis and we are heading towards a social crisis," said Juncker after chairing a regular monthly meeting of eurozone finance ministers in Brussels.

Despite some "positive signals" from recent economic data, the commission estimated that the recession would drag into 2010 when both the eurozone and EU economies would shrink another 0.1 percent and warned that the figures could be even worse.

In its last forecasts from January, the commission had predicted that the 16 nations using the euro would eke out growth of 0.4 percent in 2010 and the 27-nation EU 0.5 percent.

Despite the dramatic deterioration in the European outlook, Almunia cautiously highlighted recent improvements in some economic data, suggesting the slump may be stabilising.

"We are no longer in a freefall, but even if some positive signals are appearing we do not have the critical mass of data to say that we are out of the woods," he told a news conference in Brussels.

Europe's biggest economy, export-dependent Germany, was expected to contract by 5.4 percent this year as foreign demand for German products dries up.

Many smaller countries were likely to see even worse recessions, with Latvia due to suffer a stunning 13.1-percent contraction in its economy this year while the once-booming Irish economy is seen shrinking 9.0 percent.

Although recovery plans were expected to begin boosting limp economic activity, Europe was set to see a dramatic rise in unemployment "to hit a post-war record", the commission said.

Mass unemployment could return to haunt Europe with some 8.5 million Europeans expected to lose their jobs in 2009 and 2010, driving the jobless rate in 2010 to 11.5 percent in the eurozone and 10.9 percent in the EU.

"We really must not underestimate the multitude of problems that can come hand in hand with a rise in the unemployment rate," warned Juncker, who is also both Luxembourg's premier and finance minister.

"Millions of Europeans are put into despair when this sort of crisis sweeps through. That's why we can't underestimate the explosive effect if I may put it that way of such an economic crisis and the rise in the unemployment rate."

Government efforts to prop up slumping economies were also expected to weigh heavily on public deficits, which are projected to rise on average to 7.5 percent of gross domestic product in the EU next year.

This year, 21 out of the 27 EU countries are expected to have deficits in breach of the three-percent limit imposed by EU rules.

Still Almunia was confident that the billions of euros European governments are pumping into their economies would help revive them in the months ahead.

"The ambitious measures taken in these exceptional times are expected to put a floor under the fall in economic activity in middle of this year and allow the start of recovery at the beginning of next year," he added.

Despite the grave economic slump, Juncker said that eurozone finance ministers agreed that there was no need to come up with a second round of stimulus measures before the impact of the first round became clear.

"We don't believe that it is appropriate to launch other such efforts in a vacuum," he said.