The euro zone shrank by 2.5% in the first three months of the year, much more than expected, with Germany faring worst in figures which undermined hopes for an early global recovery.
Germany, Europe's largest economy, fell by 3.8% - its worst performance since reunification in 1990, in quarter-on-quarter data released on Friday.
“This is ... a worse start to the year than we could have imagined,” Juergen Michels at Citigroup said of Germany's data.
“It can't get much worse, but not much better either. It is questionable whether the economy will grow again this year.”
The European Union's statistics office Eurostat said gross domestic product of the 16 countries using the euro contracted 2.5% quarter-on-quarter for a 4.6% contraction year-on-year - the worst on record.
The currency bloc had been predicted to contract by 2.0%, Germany by 3.0%.
Separate figures showed Italian GDP fell 2.4% in the first quarter, the steepest fall since the data series began in 1980. French output dropped a more modest 1.2%.
The figures added to evidence that despite signs the worst global recession in six decades might be easing, recovery remained elusive. Companies are still slashing costs and jobs, and banks are scrambling for more cash to cover their losses.
Data on Wednesday showing a surprise drop in US retail sales and a slump in euro zone industry output triggered a sell-off in stocks that had rallied sharply over the past two months on hopes the world's recession was past the worst.
Industry and consumer confidence surveys have signaled a slowing rate of decline across much of the world in recent weeks and central bankers have also talked up recovery hopes.
But hefty company losses and job cuts - this week from the likes of Nike, Sony and UK telecoms giant BT - have provided a bleak counterbalance.
Plant shutdowns in the stricken US auto industry also pushed up US jobless claims after two weeks of improvement.
“Fear and greed (have) a huge part to play right now with everyone desperate to call the bottom of the market but absolutely terrified that these so-called green shoots will quickly turn into dead weeds,” said Andrew Turnbull, senior sales manager at ODL Securities.
Banks, at the epicenter of the financial crisis that began with a US housing market meltdown, continue to face trouble or at the very least, a pressing need to raise capital.
International Monetary Fund chief Dominique Strauss-Kahn said the banking sector remained of primary concern and massive government stimulus spending would count for little until banks were cleared of bad debts.
“We still believe in the IMF there is a lot do in the cleansing of the balance sheets,” he told a news conference in Vienna. “You never recover until the cleansing ... has been done. You may have as much stimulus as you want.”
Barclays is in talks to sell its asset management business, Barclays Global Investors, a source familiar with the matter said. Its shares jumped nearly 10% in response.
The Financial Times said Barclays was discussing a sale of the business for up to $10 billion to potential bidders including US money manager Blackrock.
Sources said on Friday that Mizuho Financial Group will raise up to $8.4 billion by issuing common shares and preferred securities, the latest scramble for capital by a major Japanese bank.
Also in Japan, electronics maker Panasonic Corp reported an annual net loss of ¥379 billion ($3.95 billion).
Japanese machinery orders for March showed orders fell less than expected but companies had no plans to ramp up spending any time soon.
“We can see inventory adjustments helping manufacturers and some improvement in sentiment. However, it is too early to say Japan is on a recovery path,” Finance Minister Kaoru Yosano said after a cabinet meeting. (Reuters)