European business confidence declined more than forecast, the European Commission announced Friday -- an indication slowing euro-zone economy and rising inflation are beginning to lower business executives' expectations for the immediate quarters ahead.

The EC's sentiment index fell to 94.9 in May from 97.6 in April. It was the index's lowest reading since May 2005, Bloomberg News reported Friday.

Europe's major stock markets closed mixed Friday on the news. London's FTSE gained 11.70 points to 5529.90, Germany's DAX decline 37.69 to 6,421.91, and France's CAC 40 dropped 28.87 to 4,397.32.

Europe's execs: in defensive mode

London-based economist Mark Chandler told BloggingStocks that the slowdown in the United States, record oil prices, and rising inflation on the continent have but many of Europe's executives in defensive mode.

"Maybe the biggest concern is the impact of the slowdown in America and its affect on trade. Executives here are really concerned about a possible deeper U.S. recession dragging Europe lower. Their concern is well-rooted, because there's just not enough Asia demand to compensate," Chandler said. "Oil prices hitting $140 are another negative. It's not going to hurt the U.K. as much, but Europe could really be hurt by consumers cutting back spending on retail goods.

Chandler added that the euro-zone rising inflation rate, now running at a 3.7% annualized, is also weighing on businesses and consumers. "Everyone now fully expects inflation to remain a percentage point or more higher than it would be, due to oil, so businesses are adjusting their cost estimates accordingly. That translates into less capital investment, lower retail sales expectations, and reduced trade -- all negatives for Europe," Chandler said. "Europe hasn't faced as deep a housing correction as the U.S., but it's starting to feel every other negative during this slump that the U.S. experienced."

With the above in mind, Chandler put the chances of a euro-zone recession at 20-30% heading into the second half of 2008. "I still see 1.4-1.8% GDP growth for the euro-zone for 2008, but a deceleration has clearly been underway for the last two quarters," he said.