The forecast means that the euro zone, long the laggard of major economic powers, would be the fastest growing economy in the developed world, with the US growth estimated at 2.2 percent and Japan at 2.3 percent.

It would also mark only a marginal slowdown from 2006, when the euro zone grew 2.7 percent -- its fastest pace of growth since the peak of the dot.com bubble at the turn of the decade.

The European Union's executive arm estimated in its semiannual update of its official economic forecasts that the broader EU economy would grow even more quickly this year than in the euro zone.

It estimated that the 27-nation economy would expand 2.9 percent, raising its projection from a forecast of 2.7 percent in February.

German forecast upgraded to 2.5 percent

Sharply stronger-than-expected growth in Germany boosted the overall outlook with Europe's biggest economy forecast to grow 2.5 percent this year, up from a previous forecast of 1.8 percent.

The Commission also upgraded its forecast for French economic growth this year to 2.4 percent with a slight dip to 2.3 percent forecast for 2008.

Despite the improved outlook, the French figures lag behind the average for the 13 nations which use the euro currency, where growth was estimated at 2.6 percent for this year and 2.5 percent for 2008.

The Commission forecast that growth would ease only slightly to 2.5 percent in the euro zone and 2.7 percent in the EU.

"The European Union and the euro area remain on a brisk growth path that should reduce the unemployment rate and the average public deficit further to levels not seen in a long time," said EU Economic and Monetary Affairs Commissioner Joaquin Almunia.

Economic boom benefits employment

The broad-based economic recovery underway in Europe has helped drive down unemployment rates which have long been a major headache for European politicians.

The Commission predicted that the euro zone would see six million new jobs created between 2006 and 2008 and that the unemployment rate would fall from 7.3 percent this year to 6.9 percent in 2008.

The strong economic growth outlook was expected to ease the strain on government coffers in the euro zone, where members are bound by EU rules to keep their deficits to less than 3.0 percent of output or face fines.

Public deficits and inflation to fall

The Commission, which has the job of policing public finances in the EU, forecast that average public deficit levels would fall this year to 1.0 percent, with only Portugal over 3.0 percent with a deficit of 3.5 percent.

Meanwhile, euro zone inflation was forecast to fall to 1.9 percent in 2007 and 2008 from 2.2 percent in 2006, putting price growth spot on the European Central Bank's (ECB) preferred level of less than but close to 2.0 percent.

The Commission said that growth could turn out even stronger than expected if falling unemployment levels lifted consumer confidence and in turn boosted broader domestic demand.

But it also warned that there were risks to the outlook, especially if a slowdown underway in the United States proved to be greater than expected and if oil prices spiked higher.