BRUSSELS (Bloomberg) — European governments' debt burden may continue to swell for "some time", the European Commission said, as the Greek fiscal crisis threatens to spread and more nations risk having their credit ratings cut.

The average deficit in the 16-nation euro region may rise to 6.6 percent of gross domestic product this year from 6.3 percent in 2009, the commission, the European Union's executive arm in Brussels, said in semi-annual economic forecasts published yesterday.

Overall government debt may surge to 88.5 percent of GDP in 2011 from 84.7 percent this year. Those debt and deficit figures would be the highest since the introduction of the euro in 1999.

Euro-area authorities and the International Monetary Fund on Sunday 2 were forced to offer Greece a 110 billion euro ($143 billion) aid package to prevent a default. European Central Bank council member Axel Weber said yesterday that there is a "threat of grave contagion effects" in the euro area.

So far, the Greek rescue package has failed to restore investor confidence. Greece's bond yields have jumped above their level before the government agreed to the bailout, and Spanish and Portuguese bonds have renewed their slide on concerns about their ability to cut their deficits.

Moody's today placed Portugal's Aa2 rating on review for a possible downgrade. The nation already suffered a rating cut by Standard & Poor's last week. Fitch Ratings said Spain may have to take extra measures to cut its deficit if the government's growth forecasts turn out to be too optimistic (see separate stories below).

The extra yield investors demand to hold Portuguese ten-year bonds over German bunds rose to the highest since the euro's debut. The premiums on Spanish and Greek debt also increased, and the euro slumped on the contagion concerns.

"Public finances are hit hard by the crisis," EU Commissioner for Economic and Monetary Affairs Olli Rehn told reporters in Brussels yesterday. "It is absolutely essential to contain the bush fire in Greece so it does not become a forest fire" in the rest of the euro area.

"Deterioration of public finances is projected to come to a halt next year, but debt will continue to increase still for some time," Rehn said.

At 11.7 percent of GDP, Ireland will have the highest budget deficit this year, the commission forecast. Greece may have a shortfall of 9.3 percent of GDP, down from 13.6 percent in 2009. The overall euro-area deficit is projected to fall to 6.1 percent of GDP in 2011, still more than double the EU limit of three percent.

The euro plunged to its weakest level against the dollar in more than a year, falling below $1.29 for the first time since March 2009. The European currency traded at $1.2820 early yesterday afternoon in London, down 1.3 percent on the day.

The commission said that "mounting concerns" about governments' ability to push down their deficits have sparked "increased turbulence in government-bond markets" and pose some of the "most important challenges" for the euro region.

"The main risk stems from the financial situation, from the uncertainties in the financial markets," Rehn said. "We have negative prospects in the situation of Greece because it might have negative spill-over effects in other countries."

The euro-area economy may expand 0.9 percent in 2010 and 1.5 percent in 2011, the commission said. It contracted 4.1 percent last year.