Germany's economy shrank by a larger than expected 3.8 percent in the first quarter, marking its worst performance since 1990 reunification and underscoring the depth of recession in the euro area.
The contraction was much deeper than the 3 percent decline predicted by analysts, raising the prospect that data for the whole 16-nation single currency bloc due at 0900 GMT will show a bigger contraction than the 2 percent forecast by economists.
The preliminary numbers follow Japanese machinery orders for March, which showed orders fell less than expected, but that companies had no plans to ramp up spending any time soon.
The data added to evidence that even as there were signs that the worst global recession in six decades might be easing, recovery remained elusive, with companies still slashing costs and jobs, and banks scrambling for more cash to cover their losses.
And while Japanese figures, showing a 1.3 percent drop in orders rather than a 4.5 percent decline seen by markets, came as a positive surprise, helping lift Tokyo stocks, German data suggested the European economy was in a worse shape than thought.
The euro fell against the dollar, and Bund futures reversed early losses.
"This is a dramatic plunge and a worse start to the year than we could have imagined," said Juergen Michels, an economist at Citigroup in London. "It can't get much worse, but not much better either. It's questionable whether the economy will grow again this year."
Year-on-year, Europe's biggest economy shrank 6.7 percent after a 1.7 percent decline in October-December.
Preliminary French statistics, also out on Friday, showed Europe's third-biggest economy contracted by 1.2 percent in the first quarter, in line with market forecasts.
The figures follow announcements of thousands of more job cuts by the likes of athletic shoe and clothing maker Nike and British telecoms group BT.
Plant shutdowns in the struggling U.S. auto industry also pushed up the number of U.S. weekly jobless claims after two weeks of improvement.
The downturn took a heavy toll on the world's banks, forcing them to seek government aid or issue new shares and debt to cover heavy losses.
On Friday, sources told Reuters that Mizuho Financial Group Inc, Japan's second-largest bank, planned to raise $8.4 billion later this year, adding to $33 billion in capital raising plans already announced by the country's top three lenders.
RECOVERY BETS
Yet, despite a patchwork of good and bad news, many investors appeared to be sticking to their bets on an economic upturn and stock markets held on to most of the gains made during a two-month rally spurred by talk of "green shoots" of recovery.
On Friday, Tokyo shares gained 1.9 percent, recovering much of Thursday's losses, as the smaller-than-forecast drop in orders buoyed machinery stocks.
Sony shares jumped 7.1 percent on cost-cutting plans and forecasts of a smaller-than-expected annual loss.
"Despite a series of dismal earnings this time around, a sense of relief has spread in the market that nothing worse will likely come out at least until April-June earnings announcements," said Fumiyuki Nakanishi, a manager at SMBC Friend Securities in Tokyo.
Other markets in Asia also took a cue from a positive finish on Wall Street, with the index of Asia Pacific stocks up 1.7 percent. U.S. stocks rebounded despite more grim news about the auto sector.
Bankrupt carmaker Chrysler moved to eliminate a quarter of its U.S. retail showrooms, while General Motors Corp, also facing possible bankruptcy in coming weeks, for the first time suggested it might follow Chrysler's route.
HEALTH WARNINGS
Ford Motor Co's assurances that it will complete its restructuring without government help and may be profitable within two years, and Wal-Mart Stores' steady quarterly profit and cautiously optimistic outlook, served as bright spots. The Wall Street Journal reported on Friday that GM is close to a deal saving billions of dollars on labour and health costs.
The good news, however, still comes with health warnings.
While Japan's machinery orders, viewed as an indicator of capital spending 6-9 months ahead, fell less than expected, companies predicted they will spend 5 percent less in April-June than they did in the first quarter.
Finance Minister Kaoru Yosano also cautioned that it was too early to say Japan was on course for recovery.
"We can see inventory adjustments helping manufacturers and some improvement in sentiment. However, it is too early to say Japan is on a recovery path," he said after a cabinet meeting.
