Tallinn - The previously overheated economy of Estonia showed fresh evidence that it was rapidly cooling off on Friday with the release of official statistics showing inflation dipped by 0.3 per cent in February compared to January.

Figures from Statistics Estonia confirmed that the consumer price index stood at 3.4 per cent compared to February 2008, the lowest figure since June 2005.

As recently as June 2008, Estonian inflation stood at 11.4 per cent. Reductions in fuel and housing costs had a large effect on the index, Statistics Estonia said.

The news will be welcomed by Prime Minister Andrus Ansip, who has identified entry to the eurozone as the nation's number one priority.

Ansip's government is implementing a tough austerity budget in order to cut costs and kickstart the economy on a more sustainable basis than previously, when a property bubble and huge inflows of foreign capital created large imbalances.

The Baltic state missed out on its planned entry in 2007 because of its inability to control inflation, despite meeting all the other Maastricht criteria which act as the rules for Euro adoption.

"Prices will continue their downward trend in coming months," said Bank of Estonia economist Martin Lindpere.

"The Estonian economic slowdown is reducing demand. This has already been reflected in the prices of services such as taxis, accommodation, rent, and eating out." (dpa)