Greece's economy will shrink more than the government is forecasting this year, its central bank governor said, while the European Commission produced an even bleaker prognosis for the debt-laden country.

Bank of Greece Governor George Provopoulos told Reuters that "bold" government cutbacks designed to tame a 300 billion euro (272 billion pounds) debt pile meant the economy would contract 2 percent this year.

His view is at odds with the finance ministry, which accepts the economy will undershoot official forecasts for a 0.3 percent contraction but does not think it will perform as badly as last year, when gross domestic product fell 2 percent.

The central bank forecast is also weaker than many economists expect but less so than the EU executive's prediction that GDP will decline by at least 2.25 percent this year, according to a report on Greece's latest efforts to cut its deficit.

Markets are watching Greece's economy closely for signs of a much steeper downturn that would undermine a goal of cutting the budget deficit to below 3 percent of GDP by 2012 from 12.7 percent last year and risk further unsettling the euro.

GDP shrank slightly less than feared at the end of 2009 and unemployment eased, according to data published a day late after nationwide strikes Thursday against government austerity measures.

Greece's 240 billion euro economy, about 2.5 percent of the euro zone's, shrank at an annual rate of 2.5 percent in the fourth quarter, slightly less sharply than a 2.6 percent contraction indicated by flash estimates.

The unemployment rate fell to 10.2 percent in December from 10.6 percent i

n November as Greece contended with its first recession in 16 years.

Both performances were worse than the euro zone average. The economy of the 16 countries using the euro contracted 2.1 percent year-on-year in the fourth quarter and unemployment was 9.9 percent in January

"The fourth quarter GDP data is not indicative of what is to come," said Dimitris Skapinakis, Chief Investment Strategist at Marfin Group. "The first and the second quarters will be bad and probably worse than the fourth quarter of 2009."

Skapinakis said the second half performance would depend largely on whether the government was in a position to introduce expansionary measures designed to counterbalance the impact of cutbacks and on the summer tourist season.

The premium investors demand to buy Greek government debt rather than benchmark German Bunds fell slightly having widened Thursday as it became clear any European Monetary Fund would not materialise in time to help Greece.

"AFRAID AND WORRIED"

A Reuters poll of economists Wednesday showed the Greek economy shrinking 1.5 percent this year and then returning to growth of 0.5 percent next year.

Yola Sefteli, manager of a sandwich shop in central Athens, said she was trying avoid raising prices in order to hang onto remaining customers.

"We have felt the recession. Staff from big companies and banks have stopped eating here," Sefteli said. "We are all afraid and worried that the restaurant might close if things get any worse or that we might need to cut staff."

Nikos Magginas, economist at National Bank of Greece, said there was little chance of an imminent improvement in the labour market despite December's uptick.

"The unemployment rate is still on an upwards trend and its slight drop in December simply reflects the relatively good state of seasonal demand," Magginas said.

Data Friday also showed industrial output declined at a much more modest pace in January while budget revenues continued to come in ahead of target -- boding well for government efforts to tame the budget deficit.

Economists fear, however, that austerity measures have yet to hit consumers' pockets and support for the government will suffer once the impact is felt.

"The Greek crisis is far from over," wrote Ben May, European Economist at Capital Economics, cutting his 2010 GDP forecast to -3.0 percent from -2.0 percent. "With the economy set to contract sharply this year, additional fiscal measures may be required for Greece to meet its budget goal."

The European Commission said in its report that cutbacks announced to date appeared sufficient for Greece to meet its budgetary targets but warned some assumptions were ambitious or that gains risked being much smaller than hoped.

It also said Greece would have to report back by May 15 with details of what measures it plans to take in 2011 and 2012.

(Additional reporting by Ingrid Melander; writing by Paul Hoskins; Editing by Ruth Pitchford)