By Guy Dresser

German analyst and investor sentiment about Europe's biggest economy improved by more than expected in January. The monthly poll of economic sentiment by the ZEW economic think tank rose to -31.0 from -45.2 in December.

Economic data in Britain showed consumer price inflation falling by its biggest margin since April 1992 in December but by less than expected after sharp falls in the oil price and a cut in value added tax to 15 percent.

The headline rate of consumer price inflation slowed to 3.1 percent from 4.1 percent, below the forecast of 2.7 percent.

On Monday, Britain threw its troubled banks a second multi-billion pound lifeline in three months on Monday and gave its central bank the green light to pump cash into the ailing economy because interest rates are already close to zero.

Underscoring the dire state of the world economy, Japan reported consumer confidence plunging to a record low last month in yet another sign of deepening recession.

Investors remained rattled, despite the second UK bank bailout, and market participants said sentiment would remain weak despite efforts worldwide to shore up the financial sector.

"This is mostly an expression of hope. The indicator is still clearly in negative territory. Nothing is changing in terms of the 2009 recession," said Gerd Hassel, economist at BHF-Bank.

Economic figures due later this week and news of corporate shake-ups and downsizing are only likely to deepen the gloom.

German retailer Metro plans to cut 15,000 jobs or about 5 percent of its global workforce by 2012, a source close to the company told Reuters on Tuesday.

And British luxury goods firm Burberry announced up to 35 million pounds ($49 million) of savings, including 540 job losses in the UK and Spain.

World stocks were down 1,2 percent and in Europe the FTSEurofirst 300 <.FTEU3> was 0.9 percent adrift.

"After yesterday's carnage, the smoke is still hanging over the market," says Justin Urquhart Stewart, director at Seven Investment Management. <.EU>.

Britain is set to confirm on Friday the world's fifth-largest economy is now in its first recession since 1992.

China, the world's main growth engine, on Tuesday reported its first rise in urban unemployment in five years. It will release Q4 GDP data on Thursday which are forecast to show annual growth at 7.0 percent, the slowest pace in nine years.

FRENCH PROMISE AUTO AID

French Prime Minister Francois Fillon said carmakers needed massive, fast financing aid and his government was considering a package to help them worth 5-6 billion euros. [nWEA2461]

"I think all European governments share this opinion -- we will not wait. There is an emergency. We need a massive response on the automobile sector's financing," Fillon said.

His comments, at a summit on helping France's battered car industry, came after the head of PSA Peugeot Citroen predicted a "terribly difficult" year in 2009 and declined to say whether the company would break even.

In Italy, trading in Fiat shares were suspended pending a statement, expected later in the day, on the outcome of talks with Chrysler and reports that a deal could see Fiat take a stake in the troubled U.S. automaker.

The auto industry's woes, most acute in the United States, highlighted the extent of the difficulties facing Barack Obama.

The first African-American to become U.S. president will take his oath against a backdrop of a deep downturn, a trillion dollar federal deficit and fears of more crippling bank losses.

Obama's team has vowed to make bailout funds work harder to get credit flowing again to cash-starved consumers and companies and is expected to announce soon changes to the second half of Washington's $700 billion bank rescue scheme.

The incoming president is also working with lawmakers to launch a two-year $825 billion fiscal stimulus plan by mid-February.

In one of the most eagerly awaited inaugural addresses, Obama is expected to reassure Americans that the country can rebound from hard times.

But he faces stratospheric expectations.

"The expectations for the Obama administration are off the charts," said Willian Keylor, a history professor at Boston University. "Whatever he accomplishes will be below the extraordinary expectations that people have for him."

Markets worry not only that bank rescues and government pump-priming will take time, but are also increasingly aware that those extraordinary actions to stem the financial wildfire come at a steep price, such as ballooning fiscal deficits.

Monday's downgrade in Spain's credit rating by Standard & Poor's drove that message home, hitting the euro as investors feared other government in the euro zone could experience the same fate as they spend heavily to refloat their economies.

(Reporting by Reuters bureaus worldwide, Editing by Mike Peacock)