The International Monetary Fund says Europe will weather what it calls the worst financial crisis for decades and will start seeing renewed growth in the second half of next year.
In its latest regional forecast, the IMF says decisive measures taken by European governments will help contain the crisis.
The IMF's director for Europe, Alessandro Leipold, praised the concerted response of European leaders to tackle the financial turmoil.
However, he also called for further bold steps to ensure financial stability including increased joint oversight and better cross-border coordination to prevent further crises.
The IMF predicts that further growth in the 15 countries that share the euro as their currency wil fall sharply to 1.3% this year and turn into a mild recession.
It says the slowdown is due to high oil prices, rising inflation, a strong euro, falling export demand and the financial crisis. However, it says inflation will slow next year - allowing room for cuts in interest rates.
The IMF warned more European banks "may fail" as doubts persist about the viability of their business models.
Private funding is "virtually unavailable" and banks will have to rely on public intervention, asset sales and consolidation, it said.