Eurostat said the aggregate budget deficit in the 17 countries using the euro fell to 4.1 percent of gross domestic product in 2011 from 6.2 percent in 2010 - the first year of the sovereign debt crisis.

Euro zone public debt, however, rose to 87.3 percent of GDP in 2011 from 85.4 percent, Eurostat said.

The euro zone's biggest economy, Germany, slashed its budget deficit to 0.8 percent in 2011 from -4.1 percent in 2010 and its debt fell to 80.5 percent of GDP from 82.5 percent.

Ireland reported a spectacular drop in the deficit to 13.4 percent from 30.9 percent as the one-off expense of shoring up its banking sector disappeared from its books. But its debt jumped to 106.4 percent from 92.2 percent.

Greece, where the crisis started, had the highest debt in Europe last year, reaching 170.6 percent of GDP even though it reduced its deficit to 9.4 percent from 10.7 percent in 2010 and 15.6 percent in 2009.

The 2011 Greek deficit number is 0.3 percentage points higher than estimated by Eurostat in April, mainly because of a downward revision of Greek economic growth, Eurostat said.

Spain, whose public finances are now in market focus, reduced its budget deficit only marginally to 9.4 percent in 2011 from 9.7 percent in 2010. The 2011 figure is 0.9 percentage points higher than previously reported.

"The increase in the deficit for 2011 is mainly due to the re-classification of capital injections by central government into Catalunya Caixa Bank, NCG Bank and Unnim Bank and to the previously unrecorded unpaid bills in the state and local government sub-sectors," Eurostat said.

But Spain's debt was still relatively low, at 69.3 percent of GDP against 61.5 percent in 2010.

Italy, also under market scrutiny cut its budget shortfall to 3.9 percent from 4.5 percent in 2010. Its debt inched higher to 120.7 percent from 119.2 percent.

Portugal, already on a euro zone financial lifeline after being cut off from market borrowing, more than halved its budget deficit last year to 4.4 percent of GDP from 9.8 percent as a result of reforms, but its debt jumped to 108.1 percent from 93.5 percent.

(Reporting By Jan Strupczewski; editing by Rex Merrifield)

• A Permanent Economic Emergency