Activity in the eurozone manufacturing sector fell for the fifth successive month in December, but showed a slight improvement on the previous month, a closely-watched survey suggests.
The Markit eurozone manufacturing PMI was 46.9, up from November's 28-month low of 46.4. Any score under 50 represents a contraction.
Employment rose in Germany and France, but fell across the bloc as a whole.
Markets in Germany, France and Italy rose after the news.
However, trading was very light, with UK markets closed for a public holiday, which can mean share movements are more pronounced than usual.
Frankfurt's Dax index was the strongest performer, rising 3%. In Paris, the Cac 40 was 2% higher and Milan's FTSE MIB was up 2.4%.
The relative strength of the German economy was also highlighted by two pieces of domestic data.
The number of people in employment in Germany hit a new record in 2011, topping 41m for the first time, official data showed.
This may have boosted consumer spending, which the German Chamber of Commerce and Industry suggested was at its highest level for more than 10 years.
Markit said manufacturing growth in the final three months of last year was the weakest since the middle of 2009. "Eurozone manufacturing is clearly undergoing another recession," said Markit's chief economist Chris Williamson. "Despite the rate of decline easing slightly in December, production appears to have been collapsing across the single currency area at a quarterly rate of approximately 1.5% in the final quarter of 2011." Markit said production levels and new orders fell in all 17 member nations in December. Austria recorded the highest score of 49, followed by France on 48.9 and Germany on 48.4. The survey also found that input prices across the eurozone fell for the third straight month. Many economists believe the eurozone economy as a whole is heading for recession, after growing by just 0.2% between July and September - the latest figures available. "Eurozone manufacturers are now very much on the back foot and finding life extremely challenging as domestic demand is hit by tighter fiscal policy across the region, squeezed consumer purchasing power, and heightened eurozone sovereign debt tensions leading to tightening credit conditions and financial market turmoil," said Howard Archer, of IHS Global Insight. The research group believes the latest PMI data provides "significant support" to the case for the European Central Bank to cut interest rates again in the next few months. A poll conducted among leading economists by the BBC last week found that, of the 27 who responded, 25 forecast a return to recession for Europe next year. Closed pharmacy Greece, which saw its first strike of the year on Tuesday, had the severest downturn in activity Eurozone summit The most severe contractions were in Italy, Greece and Spain, the Markit survey suggested. Greece, which saw its first strike of the year on Monday when doctors and pharmacists protested against cuts, had a score of just 42. Spain was 43.7, while Italy was 44.3. Markit highlighted particularly sharp falls in new business at Spain's factories, where the number of new orders has now be declining for 8 months in a row. Last week, Spain's newly elected centre-right government has said that the country's deficit was worse than previously forecast. On Friday, the government said the deficit in 2011 would be 8% of GDP rather than the 6% predicted by the outgoing socialist government. It economy minister indicated in a radio interview on Monday that the figure may be even higher. And the leaders of France and Germany have announced their first meeting of 2012 to discuss measures to tackle the crisis in the eurozone. French President Nicolas Sarkozy and German Chancellor Angela Merkel have announced they will meet on 9 January to prepare for a meeting of the European Council at the end of the month.