By Ingrid Melander and Madeline Chambers
PARIS/BERLIN (Reuters) - French factories produced much less than expected in March while German industry orders unexpectedly fell the most in 1-1/2 years, data showed on Wednesday, feeding speculation of fresh European Central Bank action to support the euro zone recovery.
France also reported a wider trade deficit, casting doubt on President Francois Hollande's recent predictions that the bloc's second-largest economy is finally turning around.
Coming after a first-quarter drop in consumer spending, the 0.7 percent drop in French industrial output in March underlined the challenges facing the economy. Analysts had forecast a rise of 0.2 percent.
German industry orders also confounded the consensus forecast for a 0.3 percent rise, tumbling 2.8 percent as demand for German capital and consumer goods from the euro zone slumped, partly due to worries about the Ukraine crisis.
Still, some analysts said the outlook in Germany remained bright despite the surprise drop.
Overall the data could give the ECB, which ends a policy meeting on Thursday, another reason to eventually loosen monetary policy alongside the strong euro, low inflation and recent money-market tensions.
"The market was getting used to the idea that the ECB would stay put this week. This kind of data is mixing the picture," said Jean-Francois Robin, head of strategy at Natixis.
French industrial output shrank for the first quarter overall as a rise in the manufacturing component was cancelled out by lower energy demand due to mild weather.
Hollande said at the weekend that the 2 trillion euro (1.64 trillion pounds) economy, bogged down by high unemployment and weak domestic demand, was on the way to turning around after stronger-than-expected 0.3 percent growth in the last quarter of 2013.
A solid turnaround is essential if France is going to keep promises to EU partners to bring its public deficit to within an EU-mandated target of 3 percent of output by 2015, down from 4.3 percent last year.
Market participants say there is very little chance of immediate ECB action to support the euro zone economy, but most believe a rate cut or some form of liquidity injection is likely from next month. Some even argue a move to print money by buying assets - so-called quantitative easing - could be on the cards.
'NO FRENCH TURNAROUND NOW'
Some analysts said the slump in German industry orders did not threaten the outlook for Europe's largest economy and was partly due to below-average large orders.
"The continued strong domestic orders show that the pickup in Germany is supported largely by domestic demand and is therefore less sensitive to swings in the global economy than in previous decades," said Stefan Kipar of Bayern LB.
Others were worried by the sharp drop in orders from the rest of the zone, however.
"The West's conflict with Russia may be unsettling companies in Europe more than previously thought," said Thomas Gitzel, chief economist at VP Bank.
"It is quite conceivable that the recovery in Germany and in the euro zone loses momentum in the second half of the year," he said.
After growth of just 0.4 percent last year, the German government predicts an expansion of 1.8 percent this year, driven by domestic demand.
France's weak data reinforced expectations that GDP growth would be smaller there in the first quarter than in the last quarter of 2013, however, and could even come in lower than some initial estimates.
"Industrial output, trade balance, GDP: the turnaround is not for now," Credit Agricole analyst Frederik Ducrozet wrote on Twitter. French first-quarter GDP data is due out on May 15.
France's March industrial output was also dragged down by low energy consumption after a mild winter, which led Barclays analyst Fabrice Montagne to say that first-quarter GDP growth could now come to 0.1 percent, below his earlier 0.2 percent estimate.
"French growth is also likely to contrast with stronger numbers in neighbouring countries such as Germany or Spain. GDP is then expected to rebound in Q2 towards the euro area average," he said.
(Additional reporting by Stephen Brown, Jean-Baptiste Vey and John Geddie; Writing by Ingrid Melander and Annika Breidthardt; Editing by Mark John and Hugh Lawson)