Shoppers in the 17-nation currency area held back spending on food, drink and increasingly pricey fuel, to drag the volume of retail trade down 0.2 percent in July from June, the EU's statistics office Eurostat said on Wednesday.

That was as expected by economists polled by Reuters, but the annual reading was still worse than the consensus forecast, as sales fell 1.7 percent compared to expectations of a 1.5 percent drop.

"The weaker trend in consumer spending is mainly due to declining real disposable incomes, reflecting slower labour income, fiscal austerity measures, and higher inflation," said Greg Fuzesi, an economist at JP Morgan, in a recent research note.

Households in the euro zone have been struggling since the global financial crisis of 2008/2009 and only saw their disposable incomes grow during the brief recovery of 2010. With consumer spending a major part of the euro zone's economy, that weakness has fed back into the downturn, and the bloc's output is expected to shrink at least 0.3 percent this year.

Meanwhile, high world oil prices driven up by tensions over Iran's nuclear ambitions have kept euro zone inflation at well above the European Central Bank's 2 percent target.

In a sign of the depth of the downturn in some parts of Europe, retail sales in Spain dropped 7.3 percent in July on an annual basis, by far the biggest drop in the bloc, reflecting an unemployment rate afflicting a quarter of the country's working population, and painful austerity measures.

Even in Germany, Europe's biggest and so far most resilient economy, retail sales fell 0.9 percent in July from June, as slowdowns in Berlin's trading partners in the euro zone and China, as well as the weak recovery in the United States, have started to dent economic performance.

Economists are divided over whether the ECB will cut rates to a new record low at its meeting on Thursday, in theory making it cheaper for the euro zone's hard-pressed households and firms to borrow. But the impact of any rate cut would be limited.

(Reporting by Robin Emmott; editing by Rex Merrifield)

• A Permanent Economic Emergency