German business sentiment rose to its strongest in 20 years in January, boosted by a manufacturing sector that has now fully recovered from the 2008 financial crisis, the Ifo economic institute said.

The Munich-based think tank said its business climate index rose to 110.3 from 109.8 in December, the highest level since records started for reunified Germany in January 1991 and confounding expectations for a flat reading.

The index is based on a monthly survey of some 7,000 firms.

"Manufacturers have made a significant leap forward and have now fully recovered from the crisis," Ifo economist Klaus Abberger said in an interview.

The upbeat reading came on the back of a run of bullish data which have shown Germany's economy pulling away from weaker members of the euro zone struggling with a sovereign debt crisis.

The ZEW survey showed German investors are increasingly optimistic about the economy and the government raised its 2011 growth forecast this week, predicting the recovery will broaden to include an upturn for previously lacklustre domestic demand.

Ifo's index on current conditions, however, inched lower to 112.8 from 112.9 last month, while its expectations reading on the outlook for the next six months rose to 107.8 from 106.8 in December.

Reuters