The European Commission has predicted that economic growth in the eurozone will come "to a virtual standstill" in the second half of 2011.
It halved its forecast for July to September to growth of just 0.2%, while the forecast for the last three months of the year is down from 0.4% to 0.1%.
The commission blamed financial market problems over the summer as well as weakening demand from outside Europe.
But it remained confident that there would not be a return to recession.
"Recoveries from financial crises are often slow and bumpy. Moreover, the EU economy is affected by a more difficult external environment, while domestic demand remains subdued," EU Economic Affairs Commissioner Olli Rehn said at a news conference to unveil the report.
"The sovereign debt crisis has worsened, and the financial market turmoil is set to dampen the real economy."
The report predicted that member states having to cut back on their spending to reduce their debt would also hit growth.
One of the countries currently cutting back its spending is Greece, which reiterated on Wednesday that it was determined to meet all the deficit reduction plans it has agreed to in exchange for its two bailouts.
There were supportive comments from eurozone leaders towards Greece on Wednesday, which boosted the stock markets on Thursday.
Eurozone leaders said Greece was an "integral" part of the eurozone.
Greece is set to receive the next loan from its initial EU and International Monetary Fund bailout later this month, but it will get this only if inspectors from the EU, European Central Bank and IMF agree that it is keeping up with its spending cut targets.
There have been concerns that they may rule that Greece has fallen behind. Without this month's loan, Greece will not be able to meet its debt payments by the middle of next month.
The commission said that inflation would fall back faster than had been expected, because commodity price rises had slowed more than predicted.
Also on Thursday, official figures from Eurostat showed that inflation in the eurozone stood at an annual rate of 2.5% in August, unchanged from July's figure.
The inflation figure for the whole of the EU was 2.9% in August, also unchanged from July.
The commission predicted that those would also be the inflation figures for the whole of 2011.