FRANKFURT (Bloomberg) — Europe's economic growth accelerated more than forecast in the fourth quarter and an increase in German investor confidence suggested the momentum will be maintained in 2007.The gross domestic product of the euro area grew 0.9 percent in the fourth quarter from the third, when it expanded 0.5 percent, the European Union's statistics office said yesterday. An index of investor expectations in Germany rose for a third month to 2.9 in February from minus 3.6 in January, the ZEW Centre said in a separate report.

Europe's economy grew the fastest in six years in 2006, with Germany one of the drivers after 11 years of below-average expansion. With companies adding workers and the US economy showing signs of rebounding, that may limit a slowdown following a German sales-tax rise and further increases in interest rates by the European Central Bank.

The economy "rounded off the strongest year since 2000 with a remarkable performance," said Silvia Pepino, an economist at JPMorgan Chase and Co. in London. "Evidence of firm underlying momentum reinforces our confidence that the euro area entered 2007 on a firm footing and that the expansion will continue."

Growth in the euro area will probably ease to 0.6 percent in the current quarter before accelerating to 0.7 percent in the next three-month period, the European Commission said yesterday. For the third quarter, growth is expected to be 0.6 percent.

The economy expanded 2.7 percent in 2006, according to the statistics office, almost double the 1.4 percent pace the prior year and the euro region's fastest growth since 2000. The 0.9 percent rise in fourth-quarter GDP exceeded the 0.6 percent median estimate of 39 analysts in a Bloomberg News survey.

"We have argued that the ECB is very sensitive to growth developments, more so than is usually acknowledged," said Jacques Cailloux, an economist at Royal Bank of Scotland. "Today's figures persuade us that March's rate hike will likely be followed by another in June."

ECB President Jean-Claude Trichet signalled last week the bank is ready to raise its benchmark rate in March for the seventh time since December 2005 to keep inflation in check. Investors expect an increase in the rate to 4 percent by September, futures trading shows.

"Despite the fact that interest rates have increased, euro-zone growth that's about potential means that they didn't hurt economic activity," ECB Governing Council member Nicholas Garganas said today at a press conference in Athens. "We see a steady economic recovery."

The Frankfurt-based ECB is concerned that the pace of economic growth will enable companies to raise prices and unions to push through demands for higher wages. Unions in Germany are demanding pay increases of up to 6.5 percent, more than three times the ECB's estimated inflation rate for 2007.

Expansion in the German economy, Europe's largest, unexpectedly accelerated to 0.9 percent as exports boomed and consumers increased spending ahead of a sales-tax increase in January. French and Italian growth also quickened.

"We should not get too carried away in the German case," said Gilles Moec, an economist at Bank of America in London. "It's likely it was boosted by a one-off phenomenon such as a boom in consumer spending in the run up to the VAT hike."