German gross domestic product contracted 0.2 percent, a slowdown from upwardly revised 0.6 percent growth in the July-September period, data showed on Wednesday.

France fared better, growing by a stronger-than-expected 0.2 percent in the fourth quarter from the previous three months as companies invested more and consumers continued to spend.

Figures for the euro zone as a whole are due at 1000 GMT and forecast to show its economy slipped by 0.3 percent quarter-on-quarter although that could now come in stronger.

Germany's figures were a little better than forecast and more forward-looking survey evidence suggests its downturn will be short-lived.

The ZEW think tank's monthly poll of economic sentiment jumped for the third month in a row on Tuesday, to its highest level since April 2011, reinforcing signs that Europe's largest economy is returning to growth.

"The first economic contraction since the end of the recession turned out to be weaker than expected, confirming that the German economy only took a growth pause and is not approaching a new recession," ING's Carsten Brzeski said.

France's economy also beat expectations that it would shrink by 0.1 percent, growing by 0.2 percent, and economists said it too might avoid recession - defined as two consecutive quarters of negative growth.

"We may see a contraction in the first quarter, but we already have indicators pointing to a recovery from the second quarter onwards," said Michel Martinez, chief France economist at Societe Generale in Paris.

Late last year, European Central Bank President Mario Draghi forecast a mild recession for the currency bloc. His latest assessment, given at a news conference following a monetary policy meeting last week. was that there was evidence of "a stabilization of economic activity at a low level."

Finland posted quarterly growth of 0.7 percent. The exception in the northern half of the currency bloc was the Netherlands which subsided into recession, shrinking by 0.7 percent, following a third-quarter contraction of 0.4 percent.

"The country data released so far this morning suggest that euro zone GDP contracted by rather less than expected in Q4 last year." said Jonathan Loynes, Chief European Economist at Capital Economics. "Coupled with the recent improvement in some of the leading indicators, that may raise hopes that the region will expand again in Q1 and hence avoid a technical recession."

PERIPHERAL MISERY

Even if the euro zone avoids recession, for its members at the epicentre of the debt crisis there is no chink of light.

Italy's economy contracted a steeper than expected 0.7 percent in the final part of last year, throwing the country into a recession expected to last for much of 2012.

The International Monetary Fund forecasts a full-year contraction of 2.2 percent in 2012, while the Bank of Italy sees a more modest decline of 1.2-1.5 percent. The government still has an official projections of -0.4 percent, considered unrealistic by all independent forecasters.

With wrangling over a second Greek bailout still unresolved, data on Tuesday showed Greece's economy shrank by a stunning 7 percent year-on-year in the fourth quarter, much worse than a Q3 decline of 5 percent. The austerity measures demanded by its lenders are likely to make things even worse.

The latest figures also make it that much harder to reach its debt targets, calling into question the wisdom of cutting so deeply.

Euro zone finance ministers have dropped plans for a special face-to-face meeting on Wednesday on Greece's new international bailout, saying political party chiefs in Athens had failed to provide the required commitment to reform.

Portugal, which many analysts expect to require bailing out for a second time too, suffered a 1.3 percent quarterly contraction in GDP, more than double the previous quarter's 0.6 fall.

(Additional reporting by Gavin Jones, writing by Mike Peacock. Editing by Jeremy Gaunt.)

• A Permanent Economic Emergency