By John O'Donnell
BRUSSELS (Reuters) - U.S. and euro zone data will help investors take the pulse of the global economy this week, but the crisis in Ukraine threatens to spoil any improvement.
Steady prices and good retail sales are expected to show the U.S. economy in a more flattering light this week, in encouraging news for the Federal Reserve as it pares back the stimulus that has buoyed financial markets for the last few years.
In the euro zone, where many investors are wondering if the European Central Bank will follow Washington's example by turning on its money printing presses, a continued but modest improvement in output is expected.
But a referendum on independence in eastern Ukraine called by pro-Russian separatists has underscored the threat of civil war in the country, a conflict that could rock confidence and hit trade between Russia and the rest of Europe.
"An escalation of the Ukraine crisis might be the trigger which leads to a correction and can bring uncertainty back to the rest of the world," said Carsten Brzeski, an economist with ING. "The return of uncertainty can really cost growth."
The crisis is having a dramatic impact on the already fragile Russian economy, dashing hopes that 2014 would be a year of recovery and placing the country instead on track for recession as investors dash to withdraw money.
Although European Union sanctions have been so far largely symbolic, the threat of stiffer penalties from the United States or Europe against Russia's banks or industry is scaring investors.
Diplomats have told Reuters that the first companies would be added to the list of targets to be sanctioned this week, freezing their assets in Europe and marking a toughening of stance against Russia. The European Union is Russia's top trading partner.
FRAGILE RECOVERY
The conflict threatens to upset Europe at a delicate moment.
The 18 countries in the euro zone are expected to announce this week that economic output has increased at the strongest rate in three years. Germany, the bloc's industrial powerhouse, is also set to report growth.
The recovery is fragile, however, with unemployment at record highs, banks reluctant to lend and sluggish prices meaning that the real burden of debts on countries such as Greece or Portugal is set to remain heavy.
Although the United States does little trade with Russia, some analysts fear that its business with Europe could be hurt.
"There could be a knock-on impact from Ukraine on the U.S. through Europe," said Laura Rosner, an economist with BNP Paribas in New York.
To compound problems, China, the engine of the global economy, is slowing.