In its twice-yearly interim economic forecasts for the 27-nation EU and the 16 countries using the single currency, the EU executive said it now expected the euro zone to grow by 1.7 percent this year, rather than the 0.9 percent it forecast in May and up from a 4.1 percent contraction in 2009.

"We now have solid ground under our feet. We have started scoring again, but there is no reason to shout for victory. We must remain alert and vigilant," Economic and Monetary Affairs Commissioner Olli Rehn told a news conference.

The cautious optimism contrasted with comments in Oslo by International Monetary Fund Managing Director Dominique Strauss-Kahn, who said there was a mood of uncertainty hanging over the European economy.

The Commission forecast is in line with projections by the European Central Bank which said on Sept 2 it expected euro zone growth to be between 1.4 and 1.7 percent this year. It was only slightly above those of analysts in a Reuters poll last week.

The Commission said risks to its forecasts were broadly balanced. Among the negative risks, it saw high debt levels and lingering tensions in sovereign debt markets.

On the other side, it listed spillovers from fast German growth to other EU countries and stronger domestic demand.

"The European economy is clearly on a path of recovery, more strongly than forecast in the spring, and the rebound of domestic demand bodes well for the job market," Rehn said.

"However, uncertainties remain and safeguarding financial stability and continuing fiscal consolidation remain key priorities."

The forecasts added to a chunk of data in the past month which have shown the European upturn may be stronger and more resilient than earlier expected.

But while markets' concerns in recent weeks have been focused on the chances of renewed recession in the United States, economists are still forecasting the U.S. economy will grow faster than Europe as budget cuts kick in across the bloc.

Rehn said structural reforms in Europe should be frontloaded to help sustain growth and job creation as the economy emerges from a deep slump caused by the financial market crisis.

He called for more wage moderation in Italy, more fiscal consolidation in Portugal, structural reforms in France, including pensions, and continued fiscal tightening in Ireland.

The Commission forecast that in the third and fourth quarter of 2010, the euro zone economy would grow 0.5 percent quarter-on-quarter and 0.3 percent respectively after a 1.0 percent expansion in the second quarter.

The Commission said private investment and consumption had contributed more to GDP growth in the second quarter than net exports and inventories and that such rebalancing boded well for the second part of the year, when demand from euro zone exports is likely to be smaller.

The EU as a whole is also likely to see much stronger economic expansion of 1.8 percent in the whole of 2010, rather than the 1.0 percent estimated in May and up from a 4.2 percent contraction in 2009, the Commission said.

The Commission almost tripled its forecast for German gross domestic product growth to 3.4 percent from 1.2 percent for 2010 and raised its projections also for France, Italy and the Netherlands and saw a smaller economic contraction in Spain.

Despite the stronger growth, euro zone inflation was likely to be slower than previously expected, it said. It forecast euro zone 2010 inflation at 1.4 percent year-on-year, down from 1.5 percent seen in May, although up from 0.3 percent in 2009.

This is below the inflation forecasts of the ECB, which expects consumer prices to grow 1.5-1.7 percent this year -- in line with its target of below, but close to 2 percent.

"The remaining slack in the economy, subdued wage growth and low inflation expectations should keep inflation in check, notwithstanding recent exchange-rate developments and weather-related price rises in some agro-commodities," it said.

The Commission projections show inflation would be slower than forecast in Germany, Italy and the Netherlands but slightly higher in France and the same as previously thought in Spain.