German economic slowdown raises fresh eurozone fears.

Berlin's Fernsehturm (TV tower) reflected in a shop window. The fall in German GDP has been blamed on a slowdown in domestic demand and construction Photograph: Felix Clay

The German economy has come to a near-standstill in the last quarter as the global slowdown hit Europe's biggest player.

In the latest blow to the eurozone, Germany grew by just 0.1% between April and June. Economists had expected growth of 0.5% during the quarter. Germany's Federal Statistics also revised down the growth in the first quarter of 2011, to 1.3% from its initial estimate of 1.5%.

With France's economy failing to grow during the quarter, Germany's GDP data shows that the eurozone economy has worsened as its debt crisis entered a new, dangerous phase. The weak performance of the two countries dragged growth across the eurozone down to just 0.2%, Eurostat reported, with the wider European Union also growing by just 0.2%.

The German slowdown was blamed on a fall in domestic consumption and construction work during the quarter. It is a blow to Angela Merkel as she prepares to meet France's Nicolas Sarkozy to discuss the euro debt crisis.

Spanish GDP grew by 0.2% during the quarter, down from 0.3% in the first three months of 2011.

The UK economy also grew by 0.2% during the quarter, according to preliminary data issued last month.

End of the Wirtschaftswunder?

Carsten Brzeski of ING said that the German data was a "growth normalisation" rather than a "disappointment" on its own, as Germany should still grow by at least 3% this year. He warned, though, that the German economic recovery is clearly slowing.

"Looking ahead, the million-dollar question is whether a solid second quarter is the beginning of the end of the German Wirtschaftswunder [economic miracle] and whether recent market turmoil could push the economy back into recession," said Brzeski.

"While German politicians are currently racking their brains on the pros and cons of common eurobonds, the luxury of having an economy running at 'wonder' speed is fading away."

Gary Jenkins, head of fixed income research at Evolution Securities, said the German data will "only add to the concern of the market that we are running into headwinds that are going to make a difficult situation even worse".

French and German officials have already indicated that Merkel and Sarkozy will not discuss the idea of issuing eurobonds – debt backed by the whole eurozone rather than individual countries.

Jenkins believes that eurobonds appear to be the "least worst option at this stage".

He said: "A temporary fiscal union may be the endgame, where you have common bond issuance for five years that replaces all individual sovereign bond issuance, after which time that is phased back in over, say another five years. Thus you retain a modicum of moral hazard."

Stock markets across Europe fell in early trading, with the FTSE 100 dropping 73 points to 5277. The euro lost ground against the dollar, as traders reacted to the news that Germany had reached near-stagnation.

"Following on the back of weak GDP data announced by France this will further undermine any efforts to resolve the eurozone debt crisis," said Max Johnson, a broker at forex specialist, Currency Solutions. But he added: "Looking around the global economy, at least there will be few, if any, cases of schadenfreude."

Latvia leads the way

Some European countries managed to grow significantly faster than the 0.2% average recorded across the sector. Belgium expanded by 0.7%, Sweden by 1.0% and Finland by 1.2%. The most rapid growth was recorded by Latvia with a 2.2% increase in GDP during the second quarter of 2011, followed by Estonia with 1.8%.

Portugal, like France, was flat – an improvement on two quarters of 0.6% negative growth. Data for some countries was not released on Tuesday, including Ireland and Greece.