The European Central Bank (ECB) lowered its key interest rate by half a percentage point on Thursday, underscoring efforts to combat recession gripping countries in the eurozone.

The decision by the ECB's governing council to reduce its benchmark refinancing rate to 2 per cent came amid a flood of gloomy economic data in what is shaping up to be a tough economic year.

It was the fourth time since October that the bank had cut rates, including a reduction of borrowing costs by 75 basis points in December, the biggest in its 10-year history.

But it still leaves the ECB rate well above that of the US Federal Reserve, which has cut borrowing costs to near zero, and the Bank of England, whose main lending rate is at an historic low of 1.5 per cent.

Lower interest rates make in cheaper for companies and consumers to borrow money, something which governments are banking on to spur growth and cushion the impact of a deepening recession.

Recent economic data has shown that a number of countries in the 16-member eurozone are already in recession, with others facing a severe economic downturn.

In Germany, Europe's biggest economy, annual growth in 2008 slumped to 1.3 per cent, nearly half of what it was the year before, as the economy contracted up to 2 per cent in the final quarter.

Analysts predict the German gross domestic product (GDP) could shrink between 2-3 per cent this year, something which would have repercussions across Europe.

Euro area industrial production slumped for the 7th consecutive month in November, leaving it 7.7 per cent below what it was a year earlier.

Eurozone inflation plunged to its lowest level in more than two years in December, dropping to a lower-than-forecast 1.6 per cent from 2.1 per cent in November.

The fall in inflation also took consumer prices comfortably below the ECB's annual inflation target of close to but below 2 per cent for the first time since August 2007.