The euro zone economy grew just 0.2 percent in the third quarter as Germany and France posted solid growth but countries at the sharp end of the debt crisis fared much worse, and analysts expect bleaker times ahead across the 17-country currency bloc.

Growth in the three months from July to September was on a par with that in the second quarter, but the outlook for the last period of the year is dim, with the region's deepening debt crisis weighing on sentiment and consumer confidence.

The key point is that this is all history, Jonathan Loynes, chief European economist at Capital Economics, said.

Forward-looking indicators suggest that the euro-zone economy is likely to drop back into recession in the fourth-quarter and beyond.

Underlining that view, Germany's ZEW institute reported that its economic sentiment index fell to -55.2 in November, below economists's forecasts and sharply down on October's figure. It said political and economic problems in Greece and Italy had increased uncertainty about the future.

The debt crisis is only likely to make matters worse in the months to come, with countries such as Italy, Greece, Ireland, Portugal and Spain forced to adopt tough austerity measures in order to stop the bond market driving them toward default.

Economists say there is no visible growth strategy in place to counter those cuts.

Looking ahead, sentiment indicators point to a significant growth slowdown. A contraction of the economy toward the end of the year is possible, ING economist Carsten Brzeski said of Germany, where growth has outstripped that of its peers.

The German economy grew 0.5 percent in July-September, in line with market forecasts, and second quarter growth was revised up to 0.3 percent from 0.1 percent.

Brzeski said the weak euro, very accommodative monetary policy and ultra-low funding costs as investors scramble to buy safe-haven Bunds had helped drive growth in Germany, the euro zone's economic engine.

But with ... France and Italy seemingly drowning in the maelstrom of the debt crisis, the German economy has lost its immunity. Austerity measures in France and Italy will also hurt German exporters, he warned.

France, the euro zone's second-biggest economy, expanded by 0.4 percent on the quarter, having contracted 0.1 percent in the previous three months.

Newly-installed European Central Bank President Mario Draghi has predicted the bloc will be suffering a mild recession by the end of the year, however, and that view was reinforced by ZEW's economist Michael Schroeder.

The risks of a technical recession have increased and we expect the economy in Germany to shrink at least in one quarter, most likely in the first quarter of next year, he said. France has also rushed through belt-tightening measures, announcing 65 billion euros of tax hikes and budget cuts over five years earlier this month, as President Nicolas Sarkozy seeks to protect the country's top-notch credit rating without killing his chances of re-election in six months' time.

Positive growth means tax revenue, but there isn't enough growth so we have to manage our budget like you do at home, or like a company chief, labor minister Xavier Bertrand said after the GDP data were released. If there's not enough money coming in then there must be less money coming out.

A report by the Lisbon Council on Tuesday said France's inability to make rapid adjustments to its economy should be ringing alarm bells for the euro zone.

It ranked France 13th out of 17 economies for its overall health, including its growth potential, employment rate and consumption, and 15th for its progress on economic adjustments, particularly on reducing its budget deficit and keeping a lid on unit labor costs.

Even some countries not under the cosh in debt terms saw their economic fortunes wane. Dutch GDP fell 0.3 percent on the quarter, although Austria and Slovakia grew by the same amount.

PERIPHERAL PAIN

Spanish figures released late last week showed the euro zone's fourth largest economy ground to a halt in the third quarter, pushing it close to recession.

The outlook is even bleaker, with the debt crisis set to curb activity further and the likely winners of Sunday's general election promising to tighten the fiscal screws further.

Neighboring Portugal, recipient of an EU/IMF bailout, is already in recession and its slump deepened in the third quarter. Its economy shrank by 0.4 percent over the three months, data showed on Monday.

Safe haven German government bonds rose as a change of government in Italy failed to halt a rise in the country's borrowing costs and signs of political dissent in Greece re-emerged as new technocrat premier Lucas Papademos took the helm.

The premium demanded to hold French, Belgian and Austrian bonds over Bunds meanwhile hit the highest levels since the euro was launched, a sign that worries over the fate of the euro zone are beginning to take a toll on higher-rated countries' debt.

The fact that the real (euro zone) economy still managed to grow amidst the escalating debt crisis is somewhat of a relief, said Martin van Vliet, an economist at ING. However, looking beneath the surface, things don't look so rosy.

(Additional reporting by Robin Emmott in Brussels; Writing by Mike Peacock; Editing by Catherine Evans)

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