ECONOMIC confidence in the 16 countries that use the euro rose to its highest level in nearly two-and-a-half years during August, the European Commission said yesterday.

The commission said its main economic sentiment indicator rose to 101.8 in August - its highest since March 2008 - from 101.1 in July. The main reason behind the rise was another improvement in consumer confidence as unemployment concerns eased but improvements in consumer confidence have not led to an appreciable rise in spending.

The increase in sentiment will stoke hopes that economic activity in the eurozone economy is holding up pretty well despite budgetary retrenchment in countries like Greece and a loss of momentum in the United States and Japan.

Germany, the eurozone's biggest economy, continues to drive the recovery, the commission said.

A particularly strong economic rebound in Germany during the second quarter, largely on the back of a sharp pickup in exports, contributed to the 1 percent quarterly rise across the whole eurozone.

Although yesterday's figures will likely cheer policy makers, the European Central Bank is not expected to change policy when it meets on Thursday and is likely to keep its main interest rate flat at 1 percent.

With unemployment still around 10 percent across the eurozone, wage growth muted and a number of governments poised for further spending cuts and tax increases to get their public finances back into shape, the outlook for the second half of the year remains less favorable.

"While the ECB forecasts are likely to show an upward revision to 2010 GDP growth this Thursday, policy rates are expected to remain on hold for a while," said Frederik Ducrozet, eurozone economist at Credit Agricole.