June 27 (Bloomberg) -- European confidence dropped more than economists forecast this month and retail sales plunged, signaling that economic growth is continuing to cool as the region's central bank prepares to lift interest rates to a seven-year high to tackle inflation.

An index measuring sentiment in the euro area fell to 94.9, the lowest since May 2005, from 97.6 the previous month, the European Commission in Brussels said today. Separate reports showed retail sales dropped at the second-fastest pace in four years, while inflation accelerated in Germany and Spain.

Stocks fell today as oil climbed to a record above $140 a barrel and Carrefour SA, Europe's biggest retailer, yesterday scaled back its earnings forecast. With soaring food and energy prices boosting inflation, ECB President Jean-Claude Trichet has said the bank may raise the benchmark rate next week by a quarter point to 4.25 percent.

``The economy has hit the wall,'' said Ken Wattret, senior economist at BNP Paribas SA in London. ECB officials ``run the risk of tipping the euro area into a recession'' as the inflation outlook increases the risk that the central bank ``may need to go beyond one rate rise.''