Consumer prices in the euro zone fell more than expected in December, data showed on Tuesday, signaling a retreat from a November peak and giving the European Central Bank more room to cut rates to historic lows as the economy heads for recession.

Inflation in the 17 countries sharing the euro was 2.7 percent in December on an annual basis, revised down from an earlier estimate of 2.8 percent for the month, the European Union's statistics office Eurostat said.

Economists polled by Reuters had expected inflation to remain at 2.8 percent in December.

Stripping out volatile energy prices, the main driver behind inflation in late 2011 that pushed it to a 3 percent peak in September, October and November, inflation was 1.9 percent.

That is at the ECB's target of below, but close to 2 percent that the Frankfurt-based bank judges to be right for price stability.

The euro zone's economy is anything but healthy at the moment, as it heads into a likely recession in 2012 after gross domestic product probably contracted in the fourth quarter of 2011 and is expected to do so again in the first quarter of 2012.

The bank has made two 25 basis points cuts since Mario Draghi took over as president in November and many economists expect the ECB to take rates to below 1 percent for the first time ever in the coming months. The ECB kept rates unchanged at its last meeting earlier this month.

Fuels for transport, heating oil, gas and electricity had the biggest impact on inflation in December, and a reading without energy and food took it down to 1.6 percent.

Energy inflation rates was a massive 9.7 percent in the month, compared to December 2010, Eurostat said.

(Reporting By Robin Emmott; editing by Jan Strupczewski)

European union Inflation