ATHENS (Reuters) – Greece's economy shrank more than expected in the second quarter and unemployment climbed to 12 percent, reflecting the pain of austerity measures agreed with lenders to overcome the country's financing crisis.

Flash estimates released by the Greek statistics service yesterday showed gross domestic product (GDP) contracted by 1.5 percent in the three months to June, and economists whose forecasts had centred on a 1.0 percent slide said things were likely to get worse before they turn better.

"We think the largest hit to private consumption from tighter fiscal policy is probably still ahead of us," said Citigroup economist Giada Giani. "We expect growth to remain negative for the rest of the year, with an average decline of around 3.5 percent for 2010."

Greece so far has mustered the political will to implement reforms and is on track to meet its goal to slash the budget deficit to 8.1 percent of GDP from 13.6 percent last year, scrambling to convince markets its past profligacy is over.

Belt-tightening helped shrink the budget gap by 45 percent in the first half, prompting praise from euro zone peers and the IMF which came to its rescue with a 110 billion euro ($141 billion) bailout in May to avert a broader debt crisis in the 16-nation currency bloc.