Europe took a tentative first step on the road to recovery yesterday when the region's two heavyweight economies, Germany and France, expanded at their fastest pace for more than a year.

But the upturn, heralded in recent weeks by a flurry of optimistic sentiment surveys, remains on a fragile footing and might yet be stifled by a renewed strengthening of the single currency, economists warned.

Germany, the euro-zone's biggest economy, shook off its second recession in as many years in the third quarter. It expanded 0.2 per cent, its first growth since the same period of last year.

The French economy rebounded strongly in the three months to September, with gross domestic product rising by a bigger-than-expected 0.4 per cent after a 0.2 per cent contraction in the second quarter.

Economists said the data suggested yesterday's "flash" estimate of third-quarter euro-zone growth - which will also show a return to growth in Italy - would come in at 0.3 per cent.

The estimate will confirm the euro zone is now over the worst of its economic woes. But it will also underline the slow pace of Europe's recovery compared with the accelerating pick-up in the US and Asia.

"On an annualised basis, the euro-zone economy grew 1.25 per cent in the third quarter ... the US managed 7.2 per cent," said Mr Rainer Guntermann of Dresdner Kleinwort Wasserstein.

But growth is expected to gain momentum in the fourth quarter. The data came amid gathering signs of optimism in the corporate sector. Industrial giant Siemens, Deutsche Telekom and Linde, the gases group, beat profit forecasts and predicted further improvements in earnings.

But the GDP data showed the pick-up in activity was heavily reliant on the strong recovery in the US, while domestic consumption, especially in Germany, remained a drag on growth.

With domestic demand constrained by consumer concerns over unemployment and welfare reforms, there was a risk a climbing euro could derail the upturn, economists said.

Yesterday the euro climbed to $1.1726, its highest level against the dollar since late October amid mounting concerns over the widening US deficits and growing problems in Iraq. - (Financial Times Service)