NEW YORK/LONDON – The global credit crisis is continuing to undermine the world economy, putting the squeeze on Japanese exports, unraveling European business confidence and deepening the U.S. housing slump.

Economic data from the United States on Thursday showed the housing market remained weaker than Wall Street's already grim estimations, with existing-home sales tumbling to a 10-year low.

In Europe, key measures of business activity and company sentiment fell more than expected in Germany, France and Italy, as well as in a survey of the 15-nation euro zone.

The Ifo institute's gauge of German business sentiment, based on a survey of about 7,000 companies, suffered its biggest drop since soon after the Sept. 11 attacks on the United States in 2001. .

Japanese exports, which are heavily dependent on U.S. demand, shrank in June for the first time in nearly five years and Bank of Japan policy-maker Atsushi Mizuno, said there was a chance that Japan could slip into a recession although he did not expect a deep one.

Thursday's data was also the latest reminder that the malaise in the world's largest economy originated in the U.S. housing market, and the rising inventory of homes for sale does not bode well for the prospects of economic recovery.

“This is not something we are going to snap out of quickly,” said Richard Sparks, senior equities analyst at Schaeffer's Investment Research in Cincinnati.

U.S. and European stocks fell. The U.S. dollar slid against the Japanese yen but rose against the euro.

Oil prices fell to a 7-week low early Thursday during Asia's trading hours, but by midday in New York, crude had reversed course and turned higher. In volatile early afternoon trading in New York, U.S. crude futures were up $2 at $126.44 a barrel.

Government bond prices jumped in the United States as investors trimmed bets on a near-term rate increase from the Federal Reserve. The 10-year U.S. Treasury note was up 21/32 in price; its yield, which moves in the opposite direction, fell to 4.04 percent from 4.12 percent late Wednesday. Euro-zone government bond prices also gained.

BAD TIMING IN EUROPE

In the euro zone, signs of weakness could not come at a worse time for the European Central Bank, which raised interest rates earlier this month by a quarter percentage point to 4.25 percent to combat inflation that is double the upper limit of its target and likely to rise further.

Germany's Ifo business climate index dropped to 97.5 in July from 101.2 in June, and was weaker than the 100.0 economists had expected.

If there were not enough gloom for Europe, British retail sales had their biggest monthly fall on record, plunging 3.9 percent and wiping out an almost equally large surge in sales the month before.

Recession risks are rising in Britain, where the housing market is plunging. A Reuters poll of economists on Wednesday put the probability of recession at a significant 40 percent, double where it was at the start of the year.

Spanish unemployment rose to 10.4 percent in the second quarter, much more than expected, as a reeling construction industry eliminated jobs.

In Scandinavia, Danish consumer confidence plunged much more than consensus forecasts to a 16-year low while Swedish unemployment staged an unexpectedly large spike to 8.1 percent in June from 5.9 percent.

CLOUDS OVER JAPAN

Data on Thursday from the world's second-largest economy were also disappointing.

Japanese exports to the United States and the European Union both fell, as did exports to other countries in Asia. That news comes against a backdrop of growing concerns that domestic spending will not be able to carry the torch for the Japanese economy.

In the United States, a surprisingly large number of people sought jobless benefits last week. Some analysts blamed seasonal factors, but the data come in the context of a jobs slump in which employers cut workers for a sixth consecutive month in June.

The Federal Reserve began lowering interest rates quickly after the credit crisis erupted late last year. More recently the U.S. central bank has signaled worries about rising inflation, which could require tighter monetary policy.

Meanwhile, news of further deterioration in the U.S. housing market came a day after the U.S. House of Representatives passed a massive rescue package.

The bill, which is awaiting Senate approval, would let the government extend an emergency lifeline to mortgage finance giants Fannie Mae and Freddie Mac .

Meanwhile, Mexico's annual inflation rose to 5.37 percent in early July, its highest level in more than three years, bolstering expectations that the central bank will raise interest rates to cap soaring food prices.

(Additional reporting by Jonathan Cable in London, Gavin Jones in Rome, Dave Graham in Berlin, Paul Day in Madrid, Kevin Plumberg in Hong Kong, Leika Kihara in Tokyo, Kazunori Takada in Wellington, Kristina Cooke in New York;

Editing by Jan Paschal)