LONDON (Reuters) - The euro dropped and European shares fell on Thursday as growth data from the region's two largest economies came in weaker than forecast, throwing a first quarter recovery for the bloc into doubt.
The German economy, Europe's largest, contracted by 0.6 percent in the final quarter of 2012, marking its worst performance since the global financial crisis was raging in 2009.
Worryingly for Berlin, it was export performance - the motor of its economy - that did most of the damage. France's 0.3 percent fall was also a touch worse than expectations.
The figures suggest the euro zone could remain slumped in recession in the first quarter of this year and pushed down the euro 0.5 percent to a session low $1.3382.
"This is major data, so it's dampening sentiment," said Anita Paluch, sales trader at Gekko Capital Markets.
"It is kind of disappointing that Germany, which had shown so much resilience, is now showing signs of suffering from the debt crisis."
Stock markets also edged lower although the impact was not so marked. The pan-European ESTOXX 50 index was down 0.1 percent by 0815 GMT with London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX all down by a similar amount.
German bonds were steady, stabilising after a fall in the previous session as demand for traditional safe-haven assets returned.
Benchmark Bund futures were 3 ticks higher on the day at 142.08, with analysts targeting a further rise if the remaining GDP data for countries such as Italy (0900 GMT), and the euro zone as a whole (1000 GMT), also come in weak.
The pain is not confined to Europe. Japan, under some pressure over its aggressive monetary and fiscal policies which are driving down the yen, came up with an unwanted riposte earlier on Thursday - its GDP shrank 0.1 percent in the fourth quarter, leaving it in recession and crushing expectations of a modest return to growth.
The Bank of Japan also kept monetary policy steady and upgraded its economic assessment, as recent falls in the yen and signs of a pick-up in global growth in recent months give it some breathing space after expanding stimulus just a month ago.
Markets in China and Taiwan remain shut for the Lunar New Year holiday but Hong Kong resumed trading on Thursday.
(Reporting by Marc Jones; Editing by Peter Graff)