(Adds Italy GDP details, quotes, and details on French spending, paragraphs 6-8)
By Luke Baker
ROME, June 21 (Reuters) - Italian business confidence unexpectedly fell in June, in the latest sign the euro zone's third largest economy is struggling to build the necessary momentum for a recovery.
Confidence among business executives dipped to a seasonally adjusted 95.3 from a 16-month high in May of 97.5, with the decline reflecting weakness across consumer, intermediate and investment goods, a survey from research body ISAE showed on Friday.
The figure, which is based on a survey of 4,000 businesses conducted in early June, was sharply below most economists' expectations.
Shortly after the report, the head of Fiat Auto, the car division of Italy's largest manufacturer, told a parliamentary hearing domestic car sales would be worse in the second half of the year than they were in the already depressed first half.
And Paolo Fresco, chief executive of the whole Fiat group , said he expected car demand in Italy to fall 15 percent in 2002 while it would fall just five percent across Europe as a whole.
The discouraging news wasn't confined to Italy.
In France, the biggest economy in the euro zone after Germany, consumer spending fell sharply in May, in what economists saw as the first sign of a prolonged retrenchment which is likely to sap economic growth this year.
With spending down 1.3 percent in the month, analysts said the figures may herald a sustained fall in household outlay, which had acted as a buffer for the French economy amid a decline in demand for its exports in the wake of September 11.
CONSUMERS FEELING DOWN, TOO
News of Italy's weaker business sentiment comes just two days after a separate report from ISAE showed consumer confidence fell to a two-year low in June as ordinary Italians worry about inflation and the impact of slower growth on jobs.
"This is the first time this year that industrialists join consumers in their bleak confidence over the national economic outlook," said Natalia Bailey, an analyst at 4Cast in London.
"Unless industrial production shows clear signs of a rebound in the next few months, GDP might end up growing by even less than our subdued 1.1 percent 2002 estimate," she said.
Most independent economists expect Italian gross domestic product to grow between 1.2-1.4 percent this year, far less than the government's official target of 2.3 percent.
Industrial production, which the industry minister expects to drive the economic recovery this year, has shown few signs of a pickup in recent months.
It fell sharply in April, partly as a result of a one-day general strike during the month, but also on the back of poor demand and output in key industries such as oil refining, transport and power generation.
In an interview published on Friday, Industry Minister Antonio Marzano said he expected growth this year to end up at somewhere between 1.3 and 1.7 percent, echoing other ministers although the government is yet to officially revise the target.
Revisions are expected to be made in early July, when the government will present its four-year economic plan to parliament. That plan is expected also to unveil a downward revision to 2003 growth, from the current 3.0 percent goal.
Despite the broad growth concerns, there is a bright spot.
Industrial orders -- a leading indicator of future industrial production -- are looking up, with figures on Thursday showing they surged 8.3 percent year-on-year in April, the biggest rise since January 2001.
That may presage a rebound in industrial production in the months ahead, but for the recovery to be sustained, economists say it will require a strong contribution from consumers, particularly with spending on big-ticket items like cars.
Yet if the consumer confidence figures are anything to go by, it may be some months before domestic demand picks up.