Ireland's government has fought off speculation that it may seek financial help from the IMF or EU [EPA]

Ireland's economy shrank by 1.2 per cent in the second quarter, official data has shown, raising fears for the nation's economy which had initially forecast modest growth for the period.

Economists had predicted a modest rise in gross domestic product (GDP) of 0.5 per cent in the three months to the end of June, after the Irish economy escaped from recession in the first quarter.

The surprise news, released on Thursday, is likely to add pressure onto Brian Cowen, the Irish prime minister, who is seeking to reassure investors that the country is not on the verge of financial meltdown.

The Central Statistics Office report comes just days after Ireland's government fought off speculation that will have to seek assistance from the International Monetary Fund or European Union due to the strains on its public finances.

'Dead cat bounce'

Ireland and Greece are the only eurozone nations currently in economic contraction.

Analysts believe Irish economic growth will be flat this year, missing a government forecast for growth of about one per cent.

Ireland's open economy is heavily reliant on overseas demand, and surveys on Thursday showed growth rates in the euro zone's services and manufacturing sectors slowed more than forecast this month.

"These numbers show that far from having turned the corner earlier this year, the Irish economy suffered a 'dead cat bounce'," Joan Burton, finance spokeswoman for the opposition Labour Party, was quoted by the AP news agency.

Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin, called Thursday's growth figures "disappointing to say the least".

But Cowen, the prime minister, rejected suggestions Ireland was on the verge of falling into a fresh recession, saying "you have to look at the full year to get the best possible estimate of how things will go".

"I think it is true that we are seeing a stabilisation this year as against a big decline. We saw a big decline in consumption in 2009 which is steadily being arrested now," he said.

The Irish economy faced falling output from the construction sector, alongside lower consumer spending and capital investment in the second quarter.

Source: Agencies