Germany's key economic barometer recovered yesterday, giving hope that the euro zone's largest economy is back on course to recovery.

News that the Ifo index rose in May after a small dip in April, to 91.5, the level reached in March, came as the European Central Bank (ECB) said that the euro-zone economy was on its way to recovery this year.

"The recovery in Europe has begun and we expect that growth will accelerate in the course of the year," said Mr Otmar Issing, the ECB's chief economist in Mainz yesterday.

That optimistic reading combined with the Ifo results pushed the euro to 0.921 cents against the dollar.

The Ifo rise came as a surprise to economists, who had expected little change in this month's index.

"The economic recovery is back on track after a slight shudder," said Mr Hans-Werner Sinn, president of Munich's Ifo economic institute. He welcomed the return to form but agreed with his chief economist, Mr Gernot Nerb, who warned against reading too much into the figures.

"The economic engine is only running on two cylinders, the others haven't sprung into action yet," he said.

The improvement in the index came from the improvement in the overall business climate in the manufacturing sector and the wholesale sector. However, the retail and construction sectors deteriorated again slightly.

"The recovery is remarkable considering the strikes in the German metal industry in May," said Mr Jörg Kraemer of Invesco Asset Management in Frankfurt.

The index, seen as an indicator of growth prospects in the rest of the euro zone, is based on a survey of more than 7,000 firms in western Germany. Managers are asked to rate, from a total of 100 points, their current business situation, and their expectations and investment plans for the next six months.

A closer look at the figures revealed a more mixed outlook for eastern business. While the outlook in the west improved from 104 to 106 points, eastern business registered a fall in their outlook from 86.5 to 85.8, the first dip in the region since December.

The rising Ifo index will be a relief to Chancellor Schröder. With elections in September, he hopes to have evidence of an economic recovery to present to voters to help him back into office.

However, Ifo had some bad news for him as well yesterday, saying that unemployment would remain stuck around 4 million for much of the year and Germany would remain "last place in Europe".