(Adds ISAE outlook in paragraphs 6-7, Marzano in 15-16)
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 some analysts said Europe's fourth 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.
Italy's government-funded economic institute ISAE struck a more upbeat tone.
"We predict a return of growth, albeit low, in the second quarter, and the pick-up could become more robust as the year unfolds, once domestic and international uncertainties have been overcome," ISAE said in a statement on Thursday.
Italy's bleak first quarter was mirrored around Europe. Data released in Brussels showed the euro zone as a whole stagnating, with growth flat -- its worst performance in just over a year.
Europe's economic engine, Germany, flailed again, shrinking 0.2 percent quarter on quarter, while the Dutch economy tipped into recession, with a provisional 0.3 percent fall.
But the European Commission stuck to its 2003 growth forecast of one percent.
STALLING NEIGHBOURS
Italy has underperformed its neighbours in recent years, but this year fellow euro zone sufferers are making life easier for the Italian government.
"With France and Germany performing badly, it is going to reduce the incentive for the Italian government to act and cut back its budget deficit," said Morgan Stanley's Guzzo.
He said Thursday's preliminary data introduced an upside risk to his 2003 budget deficit prediction of 2.7 percent.
The Italian government is forecasting a deficit to GDP ratio of 2.3 percent from full-year growth of 1.1 percent in 2003.
But at the weekend Prime Minister Silvio Berlusconi acknowledged the stagnating economy, warning growth would be below one percent this year and on Thursday Industry Minister Antonio Marzano added to the gloomy chorus. "If (positive) signs don't emerge soon, then it will be necessary to consider an appropriate political and economic remedy within the EU framework to get us out of this phase," Marzano said in a statement.
A slew of downbeat first quarter results from top-tier Italian brands have darkened the picture this week.
Flag-carrier Alitalia flew further into the red in the first quarter and said it saw a full-year loss, while Fiat and its struggling car unit showed no sign of recovery either with a worse-than-expected first quarter operating loss.
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.