Inflation has slowed across the euro zone, prompting hopes that interest rates will be cut over the coming months.

Weaker confidence in Germany also underlined analysts' expectations that the European Central Bank would have to move to reduce rates.

Irish inflation is still the highest in the euro zone but by a smaller margin than for most of last year.

Overall, falling oil prices and the rising euro led to price rises of just 0.1 per cent in December, down from 0.3 per cent in November.

Prices rose 2.6 per cent from a year earlier, down from a near seven-year high of 2.9 per cent in November. The annual average inflation rate for 2000 rose to 2.3 per cent from 1.1 per cent in 1999.

Analysts now believe that if oil prices stay around current levels, average euro zone inflation will be below the ECB's ceiling of 2 per cent by March or April, allowing the Bank to cut rates.

Irish inflation topped the table at 4.6 per cent in December, followed by Luxembourg at 4.3 per cent and Spain at 4 per cent.

Meanwhile, high interest rates and oil prices have contributed to a weakening of the economy in the EU. Fresh data yesterday showed that the business climate in Germany is still deteriorating.