Poland, Hungary and Romania, which together account for the bulk of the region's roughly 940 billion euro ($1.3 trillion) economy, beat analysts' expectations, supported by an incipient revival in demand from the neighbouring euro zone.

The pick-up in Hungarian growth, nearly twice as fast as forecast, reflected aggressive stimulus policies from the government and central bank, while Polish authorities have decided to increase this year's budget deficit to nurture the recovery.

Only the Czech economy, hurt by tight government spending and political instability, bucked the trend by shrinking again soon after emerging from a long recession. It shrank by 0.5 percent in the three months to September, defying a forecast for a 0.5 expansion.

Poland's economy, which accounts for 40 percent of the region's output, expanded by 0.6 percent compared with the second quarter, while Hungary's grew by 0.8 percent, the highest rate since early 2001.

"Looking at the region as a whole ... one can expect that domestic demand is slowly being turned on and has an increasingly large importance," said Piotr Kalisz, chief economist at Citigroup's Bank Handlowy.

In annual terms, growth in Poland picked up to 1.9 percent, more than twice the expansion from the second quarter and above analysts' forecasts of 1.6 percent.

"We have agreed that (budget) deficit reduction cannot be done at a price of stifling growth," Polish Prime Minister Donald Tusk said at a conference after the data.

"We will do everything possible to protect and increase this growth," he added, saying that a 2013 expansion of 1.5 percent was possible.

Poland is the only European Union economy to have avoided recession since the 2008 global financial crisis. But growth nearly evaporated at the start of this year as the government tried to tighten its budget and export markets weakened.

Since then the government has also freed up scope for spending with a controversial pension reform, while Polish industry expanded at the fastest pace in 2-1/2 years in October boosted by a jump in new export orders.

Billions of euros from EU development funds are also expected to start pouring into the Polish economy from early 2015.

Zbigniew Jagiello, the chief executive of Poland's largest bank PKO BP (>> PKO Bank Polski SA), flagged a turnaround. "We are in a phase of economic growth, which means that consumers will be more willing to take out loans," he told a conference on Thursday.

HUNGARY PICKS UP, CZECH ECONOMY SLUMPS

Hungary's roughly 100 billion euro economy grew an annual 1.7 percent based on initial data, nearly double the 0.9 percent expansion analysts had forecast.

The government, which faces elections next year, has encouraged consumer spending by slashing households' energy utility bills by roughly 20 percent.

The statistics office said growth was driven by higher output in agriculture, industry and construction. The country's economy ministry said growth could pick up to 2.5 percent in the last quarter of this year.

The central bank, which has cut rates to an all-time low of 3.40 percent, also plans to give commercial banks free funding to lend to small businesses. Poland, too, has launched a scheme to aid lending to businesses.

Nomura's Peter Attard Montalto called the Hungarian data a "massive upside surprise" and said it suggested growth was coming from a "vibrant export sector, inventory build and ... (the central bank) pumping in free money."

Hungary's corporate sector is also showing signs of revival. Magyar Telekom (>> Magyar Telekom Tavkozlesi Nyrt), one of Hungary's biggest companies, reported a 5.4 percent increase in third-quarter revenues last week, above market expectations.

In contrast, the Czech economy shrank by 0.5 percent in the third quarter versus the previous three months, dashing expectations it could sustain growth after emerging from a six-quarter recession this year. GDP dropped 1.6 percent year-on-year.

The central bank last week launched the first crown sales on the open market for over a decade last week to avert deflation and support economic growth.

Romania's economy grew 4.1 percent on the year in the third quarter, above market expectations, and by 1.6 percent on a quarterly basis. Analysts said growth was most likely heavily boosted by a strong harvest.

But many countries in the region of ex-Communist states have still not recovered from the recession that followed the global crisis. Output in Hungary, Czech Republic and Romania has still not returned to levels from 2008.

Western European banks, which once showered cheap capital on the region, have been unwinding loans, while governments have been squeezing budgets under EU pressure.

(Editing by Ruth Pitchford)

By Marcin Goettig

Stocks treated in this article : PKO Bank Polski SA, Magyar Telekom Tavkozlesi Nyrt