Euro zone economies showed signs on Thursday that the worst recession in six decades was easing, but prospects for a British recovery were clouded by a warning over government debt and political uncertainty.
Ratings agency Standard & Poor's said it might cut Britain's rating after lowering its outlook to 'negative' from 'stable', citing rising government debt and uncertainty over how any new government would repay it after an election due by 2010.
Other agencies maintained a stable outlook for Britain.
"This is a reality check for the UK government. They are not the U.S.," said Kenneth Broux, an economist at Lloyds TSB Corporate Markets.
The United States was due to release data on claims for jobless benefits, at a time when unemployment is increasing steeply across the globe. The latest unemployment forecast shows U.S. unemployment will stay above 9 percent until 2011, suggesting a long haul to any full recovery.
Sterling tumbled against the dollar and the euro on the S&P report, which said public debt could approach 100 percent of Gross Domestic Product and stay there in the medium term.
The euro zone offered some cause for cautious optimism.
Markit's Eurozone Flash Services Purchasing Managers Index (PMI), a measure of service and manufacturing activity, rose to 44.7 in May from 43.8 last month, beating the consensus estimate of 44.5. That marked the third month in a row it had picked up and took it to its highest level since October.
However, predictions by some economists of a return to growth as early as the last quarter of this year are tempered with concerns data may yet obscure more complex underlying weaknesses in the economy.
"It is grounds for hope that things will improve over the next few months," said Peter Dixon, an economist at Commerzbank. "I'm not getting carried away by … (the figures), but equally they are a sign that the economy has pulled out of the nosedive that it was in towards the end of last year."
The FTSEurofirst 300 index of top European shares fell by as much as two percent, largely on a Federal Reserve decision to lower its growth forecast for the next three years. Asian stocks also dipped, Tokyo shares leading the decline with a 0.9 percent drop as the dollar's retreat pressured exporters.
Treasury Secretary Timothy Geithner said on Wednesday the U.S. financial system, epicentre of the global economic crisis that spread from the U.S. housing market last year, was beginning to heal. However, he said, the economy was fragile.
The Fed cut its 2009 forecast to project a 1.3-2.0 percent contraction, deeper than the 0.5-1.3 percent decline seen in January.
It expects the world's biggest economy to return to 2-3 percent growth next year.
The dollar hit its lowest level in five months against a basket of six major currencies.
Economists have said falling inventories of oil and metals and a reduced number of unsold homes indicate the recession may be easing, but the question remains whether this reflects a return of real demand or a running down of stocks.
STRONG FRENCH PERFORMANCE
The Markit PMI index showed France's economy performing more strongly than the euro zone as a whole.
The data exceeded expectations for the third straight month, Markit said, signalling that a recovery in France could be earlier than current predictions for a rebound in the fourth quarter.
"Certainly the PMIs are suggesting that we'll see a return to economic growth in the second half of the year, possibly in the early part of the second half, so Q3," said Chris Williamson, chief economist at Markit.
The PMI for the manufacturing sector climbed to 43.1 in May from 40.1 the previous month, beating forecasts for a reading of 41.0 and reaching its highest level since last August.
The rate of decline in the private sector in Germany, Europe's largest economy, eased to its slowest in seven months.
Markets will be watching for signs of improvement in the U.S. economy with publication of the Philadelphia Fed's business activity index later on Thursday.
Singapore, a small Southeast Asian economy heavily exposed to international trade and thus seen as a good proxy for global economic trends, reported a 10 percent annual contraction in its revised first quarter data on Thursday.
Taiwan's economy shrank a record 10.24 percent in the first quarter, below market expectations.
