(Adds Fiat, Alitalia, Bulgari, Dutch data, quotes)
By Claire Soares
ROME, May 15 (Reuters) - Italy's economy shuddered to a halt in the first three months of this year, contracting on a quarterly basis for the first time since 2001, and analysts said Europe's fourth-largest economy was flirting with recession.
National statistics agency Istat released preliminary data on Thursday showing Italian gross domestic product shrank 0.1 percent quarter on quarter and grew just 0.8 percent year on year, below market expectations.
The quarter on quarter growth rate was the limpest since the fourth quarter of 2001, when it also eased 0.1 percent.
"It's a very weak number and the risk is that the payback from the end of the (government) incentives that were propping up the economy could be spread over more than a quarter," said Vincenzo Guzzo, an economist at Morgan Stanley in London.
"There's certainly a risk of a technical recession," he added, referring to a widely-used definition of recession as two consecutive quarters of contraction.
Meanwhile in Europe's flailing economic engine, Germany, first quarter data on Thursday showed its economy shrank 0.2 percent quarter on quarter, and the Dutch economy tipped into recession, with a provisional 0.3 percent fall.
"I'd guess the euro zone average for the first quarter, after seeing the figures from Germany as well as Italy, is going to be close to zero," said Stephane Deo from at UBS Warburg.
The European Union statistics office was set to give a "flash estimate" for the 12-nation bloc as a whole at 1000 GMT.
A Reuters poll of analysts predicts euro zone growth of 0.1 percent from the last quarter of 2002 despite the build-up to, and outbreak of, war in Iraq during the first quarter.
STAGNATION SETTING IN?
In Italy, the Treasury is officially forecasting full-year 2003 growth of 1.1 percent, but at the weekend Prime Minister Silvio Berlusconi acknowledged that stagnation was setting in and warned growth would be below one percent this year.
A slew of downbeat first quarter results from top-tier Italian brands have deepened the gloom.
Flag-carrier Alitalia flew further into the red in the first quarter and warned the outlook had worsened and it expected a full-year loss.
Fiat, and its bleeding car unit, showed no sign of recovery either with a worse-than-expected first quarter operating loss.
And the chief executive of Italian jeweller Bulgari Francesco Trapani struck a pessimistic tone: "An immediate return to a stable and serene business environment...seems temporarily postponed."
Economists say the combination of waning industrial output and anaemic consumer demand are behind the Italian economic wobble and will be scanning Istat's definitive GDP data on June 10, which comes with a detailed breakdown.
But the unexpected first quarter contraction, if confirmed, will turn up the heat on the Italian government, as it strives for a budget deficit to GDP ratio of 2.3 percent this year, mindful of Brussels wrath if it tops three percent.
"Today's data certainly introduces an upside risk to Italy's budget deficit," said Morgan Stanley's Guzzo, who before the release had been expecting a deficit of 2.7 percent.