The EU's executive said both the 27-nation EU and the 16 countries that use the euro currency will shrink by 4 percent this year, more than double its January estimates, when it forecast a 1.8 percent contraction for the EU and a 1.9 percent decline for the euro-zone area.
Germany, which is highly dependent on exports and is Europe's biggest economy, will be hit hard by the "near collapse" in global trade, the European Commission said, contracting by an estimated 5.4 percent as global demand dries up for its high-value goods such as cars and machinery. In January, the EU thought Germany would only shrink 2.3 percent this year.
The EU's top economy official, Joaquin Almunia, blamed the EU downgrade on an "exceptionally bad" first three months of this year as industrial output slumped at a record pace, exports stalled and business and consumer confidence hit new lows. EU growth figures for the first quarter are due on May 15.
Almunia told reporters that recent surveys for euro-zone and German confidence "appear to confirm that the economy is no longer in free fall." He said the EU now expected the economy to start bottoming out in the middle of this year as "the fiscal stimulus measures, the bank rescue plans and the monetary easing are expected to start bearing fruit in the next quarters."
He said a new stimulus package could not be ruled out and could be discussed by EU leaders at a June summit.
Quarterly growth is unlikely to emerge until 2010, Almunia said, but even then both the EU and the euro-zone will likely shrink 0.1 percent over the whole year provided stability emerges in the banking sector and world trade turns around.
Plunging exports and industrial output are causing the economy to shrink - and will see some 8.5 million jobs shed from the EU in 2009 and 2010, more than wiping out the number of new jobs created in the last two years. In the 16 nations that use the euro, unemployment will hit a postwar record of 11.5 percent next year.
Euro-zone exports are "forecast to suffer one of the worst setbacks on record" with a 13-percent slump this year, partly because the strong euro makes euro goods more expensive for U.S. and British customers.
Germany will see exports shrink by a worse 16 percent, forcing companies to reduce investment in new equipment by a fifth and cut 1.5 million jobs this year and next year. An export pick-up next year is Germany's main hope for growth, the EU said, as household demand and business spending will remain weak next year.
The EU forecast that Britain and Italy will shrink by between 4 percent to 4.5 percent this year, while France, cushioned by heavy government spending that supports growth, will post a smaller 3-percent drop. Spain will also likely shrink by 3 percent.
Only one of the EU's 27 states - Cyprus - may see economic growth this year, while countries cooling from a housing bubble experience the biggest tumble in growth rates - Latvia, Lithuania and Estonia are all expected to post double-digit declines.
Both Britain and France will see unemployment climb over 3 million next year - with France reporting an 11 percent jobless rate, the EU said. Spain is forecast to fare worse with one in five workers unable to find a job - an unemployment rate of 20 percent.
The EU warned that even worse may be ahead and banks' efforts to deleverage - shore up their financial position by putting more money aside to cover bad debt - "may unravel with greater intensity than currently expected."
It also said a bad debt spiral from falling house prices could trigger a wave of business bankruptcies that lift unemployment and lead to more debt defaults.
To avoid this, it called on European governments to shore up confidence in banks by moving swiftly to clean up banks' balance sheets by taking on hard-to-value assets that have racked up huge losses and launching new bank recapitalizations as needed.
EU banks have already written down euro290 billion in losses, it said, calling for close-monitoring of debt defaults, particularly in eastern Europe where many western banks may face bad loan books as housing prices collapse and unemployment rises.
It also warned of fluctuating exchange rates and protectionist measures that could further cut global trade and remove a major crutch to an economic recovery next year.
The EU said Europe faces a limited risk of deflation - a corrosive spiral of falling prices - but that several countries will see "disinflation" for several months this year as energy prices plunge from record highs last summer.
The EU now expects euro-zone inflation of 0.4 percent this year and said lower inflation and interest rates may help support the economy by giving people more money to spend and less to repay on housing loans.