The European Commission's economic sentiment indicator rose by 0.6 points in the euro zone to 93.4, the first improvement in sentiment since March last year as some confidence returned to services, consumers and construction.

The indicator was still slightly lower than forecast by economists polled by Reuters, underscoring the difficulty of measuring the rising optimism that is still tempered by EU leaders' inability to resolve the euro zone debt crisis.

The business climate indicator also rose for the second month in a row to -0.21, in line with economists' expectations.

The mixed picture was evident in the Commission's industrial confidence indicator, which remained unchanged in January, as factory managers said they saw a deterioration in their assessment of their order books, though this was offset by a positive assessment of their stocks.

Confidence in services, meanwhile, rebounded by 2 points in the euro zone and construction also rose 0.6.

Economists are divided over how deep the euro zone's economic contraction will be after the European Central Bank's decision in December to provide 3-year loans to banks averted a credit freeze.

But budget austerity and political divisions over how to solve the two-year debt crisis continue to depress business in the euro zone and the wider European Union, with non-euro zone country Britain heading for a recession in early 2011.

The European Commission forecasts 2012 economic growth of just 0.5 percent for the 17 nations in the euro zone, which generates 16 percent of global economic output. The International Monetary Fund is more pessimistic, forecasting a 0.5 percent contraction in 2012 that it says could drag the world into recession.

EU leaders hope to sketch a pathway out of the slump at a summit in Brussels on Monday, but a big divergence in the performance of the 27-nation bloc's economies makes that a tough task, while spending cuts are still the order of the day.

Recent data suggests Germany will avoid a recession, while non-euro zone member Britain, as well as euro states Spain, Italy, Greece and Portugal, are likely to see their economies contract in 2012. Belgium and the Netherlands, also members of the single currency, will struggle to grow at all.

(Reporting By Robin Emmott; editing by Rex Merrifield)

• A Permanent Economic Emergency