Eurozone economic growth is close to a standstill, with Germany’s prospects deteriorating further this month, according to a closely watched survey.

Economic activity barely increased in August, purchasing managers’ indices for the 17-country region indicated on Tuesday - and the manufacturing sector went into reverse for the first time in two years.

With evidence building that the euro zone debt crisis is increasingly undermining business confidence, the latest readings suggested growth would remain weak in the coming months, adding to the difficulties facing the region’s leaders as they seek to restore confidence in Europe’s monetary union.

“Most worrying is the near-stagnation in Germany, which suggests that the region’s main engine of growth has stalled,” said Chris Williamson, chief economist at Markit, which produces the indices. German service sector expectations about the business outlook registered the biggest drop since the survey began in mid-1997, Markit said.

France, however, reported a surprise - although slight - recovery in private-sector activity in August, and overall, the euro zone purchasing managers’ indices were not as bleak as economists had feared, boosting hopes the region would escape a double-dip contraction.

“The PMIs continue to point to very modest growth, but no recession,” said Marco Valli at Unicredit in Milan.

Led by Germany, the euro zone economy grew strongly in the first three months of this year. But since then, continental Europe’s largest economies have been affected by the slowdown elsewhere in the world. This has dampened exports, with domestic fiscal austerity measures acting as a further brake on activity. Data last week showed German gross domestic product expanded by just 0.1 per cent in the second quarter compared with the first. Euro zone GDP increased by 0.2 per cent over the same period.

The latest purchasing managers’ indices, regarded as up-to-date indicators of growth trends, suggested growth in the third quarter could prove even weaker.

The “composite” index, covering services and manufacturing, remained at 51.1 in August, unchanged from July’s level, but otherwise the lowest for almost two years.

The manufacturing index dropped from 50.4 to 49.7 in August - falling below the 50 level, which marks the boundary between expansion and contraction for the first time since September 2009.

For Germany, the composite index fell from 52.5 to 51.3, the lowest for more than two years. The country’s manufacturing index remain unchanged at 52 but its service sector index dropped sharply, from 52.9 to 50.4 - perhaps an indication that domestic-orientated companies were suffering the worst decline in confidence as a result of the euro zone debt crisis.

Highlighting worries about Germany’s economy, the Mannheim-based ZEW institute’s index of German investor sentiment fell sharply in August to minus 37.6 points - the lowest since December 2008. It blamed the U.S. credit downgrade, euro zone woes and weak German growth data.

Earlier this week, the Germany’s Bundesbank central bank forecast that the country’s economy would continue to grow in the second half of 2011 - although “somewhat more slowly” than before. But it also foresaw a “range of global risk factors” - including worries about the US economy, a slowdown in emerging markets, and financial market nervousness.

In the latest indication of financial market nervousness over the euro zone, the European Central Bank reported a further increase to almost €130-billion in the amount parked overnight by banks in its deposit facility rather than lent to other banks - taking the level back towards the €145-billion peak seen earlier this month.