German business confidence has slumped unexpectedly to its lowest level in nine months, according to the closely watched Ifo index, writes Derek Scally in Berlin.

However, Munich's Ifo Institute said that the fall in its index of business sentiment to 94.6 from 96.0 in June would not interfere with a predicted moderate recovery later this year.

"It's a disappointment for everyone as we really expected an increase," said Mr Hans-Werner Sinn, head of Ifo. "But I am still mildly optimistic that we can get decent growth this year in Germany, not enough growth to be really happy about it but we do expect substantial growth."

He warned against any premature judgments about Germany's growth prospects, restating Ifo policy to wait for three consecutive monthly falls before identifying a trend.

The Ifo index is seen as an indicator of growth prospects in the rest of the euro zone and is based on a survey of more than 7,000 firms in western Germany.

"Absolutely nothing is happening on the employment market," admitted Mr Gernot Nerb, the Ifo's chief economist.

Germany's economy is expected to grow by around 1.7 per cent this year, after 0.4 per cent growth in the first quarter.