German business sentiment surged in March to levels last seen before September's attacks on US cities, revealing growing confidence that Europe's biggest economy was emerging from mild recession. The higher-than-expected reading of the Ifo index, Germany's main business indicator, was good news for the embattled German Chancellor Mr Gerhard Schröder, struggling to restore his economic credentials before elections in September.

The index climbed for the fifth month in a row to an 11-month high, reinforcing expectations that the next interest rate move by the European Central Bank will be up.

The Ifo economic institute said its headline west German index, derived from a monthly survey of about 7,000 firms, rose to 91.8 from 88.5. It hit the highest level since April 2001 and was well above the consensus forecast for 90.3. Sentiment also improved in Italy, the euro-zone's third-largest economy, where its March business climate index hit its highest level since last August and January retail also saw the biggest jump since the September attacks.