Germany needs a "huge common effort" to ward off economic disaster, according to the finance minister, Mr Hans Eichel, as new data show Europe's largest economy is teetering on the brink of recession.

A grim-faced Mr Eichel announced a collapse in tax revenues, down €126.4 billion over the next three years, making it unlikely Germany will balance its budget by 2006 as demanded by Brussels.

"We simply cannot continue as we have in the past. . . we are living beyond our means," said Mr Eichel in Berlin yesterday.

The announcement came as the Federal Statistics Office published data showing that the German economy shrank by 0.2 per cent in the first quarter of this year.

After "minus zero per cent" growth in the last quarter of 2002, the German economy has avoided a recession, two periods of negative growth, on a technicality.

Mr Eichel insisted the economy wasn't officially in recession and said he was optimistic that the economy would turn around in the second half of this year.

"There are new opportunities for a global economic recovery after the quick end of the war in Iraq. The lower oil price contributes to that," he told reporters.

Mr Eichel prepared the ground for yesterday's announcement when he admitted at the weekend that he would not be able to balance the federal budget by 2006 as planned, and that Germany would run up a deficit of more than 3 per cent of gross domestic product again this year, breaching euro guidelines for the second year running.

Asked yesterday if the euro-zone stability pact rules should be loosened, Mr Eichel replied: "The answer is 'no'."

He declined to say when he thought he would present a balanced budget.