"The situation in the euro area has taken a serious turn for the worse in the past month," the Institute of International Finance (IIF) said in global outlook report.
"The economy has tipped into what we believe to be a recession, which will only serve to widen budget deficits and weaken bank asset quality further," the IIF said.
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Incoming economic data for the just-ended third quarter and the early fourth quarter have been weaker than expected, the Washington-based trade group said.
The IIF economists highlighted a rise in unemployment in Germany, Europe's biggest economy, and slowing industrial production in the eurozone.
The IIF forecast that eurozone gross domestic product (GDP) -- the output of goods and services -- would contract 2.0 per cent in the fourth quarter compared with the year-ago quarter, and endure the same contraction in the first three months of next year.
For all of 2012, GDP was expected to shrink 1.0 per cent from this year, said the IIF, which represents more than 450 banks and financial institutions in more than 70 countries.
"Weakness in the euro area is apt to spill over to the rest of the world through a number of channels. One of the most immediate and powerful of these is through the banking sector," it warned.
The IIF, with about half its members based in Europe, criticised European policymakers' handling of the public debt crisis, saying "some of their actions may be making the problem worse, not better".
It singled out the late October agreement to bail out debt-wracked Greece for a second time, in which the IIF accepted that the private sector could forgive up to 50 per cent of the Greek government debt it holds.
"The program to provide debt relief for Greece has scared bond investors away from other peripheral markets," the IIF report said.
The latest Greek bailout plan remains in limbo pending the release of frozen funds from the first European Union-International Monetary Fund rescue launched in 2010, which have been held up by delays in Athens on reform commitments.
