BRUSSELS (AFP) - The European economy will suffer collateral damage from the crisis roiling the financial sector, although the extent of the fallout remains to be seen, ministers and analysts warned on Wednesday.

"Volatile equity markets, the general climate of uncertainty and some potential further tightening of lending standards by banks could weigh on eurozone growth," predicted Bank of America economist Holger Schmieding.

Even before the latest shockwaves to shake the financial sector, the European economy was struggling with a sharp slowdown in the face of record oil prices, a strong euro and limp global economic activity.

Last week, the European Commission estimated that Europe was teetering on the brink of a technical recession, which economists define as two consecutive quarters of contraction.

After the 15-nation eurozone economy contracted 0.2 percent in the second quarter, the European Union's executive arm forecast that it would be at a standstill in the third quarter.

"So far, we consider it more likely that the eurozone will stagnate rather than shrink substantially. But the risk of a genuine recession has risen," Bank of America's Schmieding said.

While not expecting a "huge impact" from the crisis, LuxembourgFinance MinisterJean-Claude Juncker said: "I don't think the events we are witnessing are helpful for the general growth situation, given the fact that confidence is lacking."

"I'm trying not to give reason for panic," said Juncker, who speaks on behalf of eurozone finance ministers as chairman of their regular meetings.

Economist Howard Archer at consultants Global Insight warned that the financial crisis "counters the recent positive developments for the region of sharply lower oil prices and the euro's retreat from its July peak levels".

He warned that the financial sector crisis "will weigh down significantly on already very fragile business and consumer confidence."

"It is also likely to deepen and extend the credit crunch, thereby making borrowing more difficult and costly for businesses and consumers," he added.

"This will also adversely affect housing markets, intensifying the problems in countries such as Spain and Ireland, also the UK outside the eurozone."

With turmoil in the financial sector, banks have reined in lending to each other, which in turn has made it more difficult for businesses and consumers to get credit.

Global central banks pumped billions of dollars and euros into the financial system earlier this week in a bid to keep the credit crunch from getting worse.

Economist Marco Annunziata at Italian bank Unicredit said concerns about inflation "should drop out of the radar screen within the next few months" as recession fears drive commodity prices down from record highs reached in recent months.

"This is extremely positive on two counts: it will give central banks more room for manoeuvre and support households' purchasing power," he said.

Ever vigilant about inflation, the European Central Bank has been reluctant so far to cut interest rates in the face of slowing activity.

But if the financial crisis worsens that could change, predicted Global Insight's Archer.

"I still think the ECB is most likely to cut interest rates in the first quarter of 2009 but if the financial turmoil deepens and is extended, and increasingly hits an already very fragile eurozone economy, it could lead to the ECB acting on interest rates before the end of 2008," he said.

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