Economic growth across the eurozone will be lower in 2008 than estimated, while inflation will stay high, the European Commission has said.
A global lending crisis is acting as a drag on the eurozone economy
Brussels now expects growth of 1.8% this year in the 15-nation eurozone.
This is lower than its November estimate of 2.2%, and below the growth rate of 2.7% recorded in 2007.
The Commission said credit market turmoil, slower US growth and surging oil prices would weigh on growth, while inflation would rise to 2.6%.
"Europe clearly begins to feel the impact of the global headwinds in terms of lower growth and higher inflation," said Joaquín Almunia, Economic and Monetary Affairs Commissioner.
But he denied that the eurozone was heading into a period of stagflation, a term used to describe an economic environment of negative growth and rising prices.
Some analysts, considering that the downgrade still veered on the optimistic side, expected further downward revisions.
"We expect a sharper slowdown to 1.3%," said Sunil Kapadia, an economist at UBS.
The Commission said that the deceleration in growth could be short-lived if the US picked up later in the year and lending costs and conditions eased.
At the same time, it expected consumer inflation to fall back to just above 2% - the European Central Bank's target rate - by the end of 2008.
But Mr Almunia warned that while the risks to the inflation outlook now appeared more balanced, they were still "on the upside".
He added: "The increase in inflation expectations [is] a particular source of concern."
The comments underscore the challenges faced by the European Central Bank, which faces the twin threats of rising inflation and a slowing economy.