German unemployment continued its six-month downward spiral in September, reaching a new low of 10.1 per cent as consumer confidence continued to rise.

Last month's drop in Germany's seasonally adjusted jobless total by 134,000 to 4.2 million - down over 400,000 year on year - was called "unusually strong" by the federal labour office. "The unemployment rate in September sank significantly due to a cyclical upward trend," said Mr Frank-Jürgen Weise, head of the federal labour office. "The number of jobs, along with job vacancies, is increasing further."

The seasonally adjusted jobless figure remained largely unchanged at 10.6 per cent, he said.

"Companies have more and more confidence in the sustainability of the upswing and are hiring employees again," said economics minister Michael Glos.

Their Social Democrat coalition partners were more cautious, having experienced the labour market's ups and downs - mostly ups - in the last eight years. "The figures are no reason for self-satisfaction, but a huge encouragement to continue our course," said SPD general secretary, Hubertus Heil.

Despite the drop, the figures made clear that, on the labour market at least, Germany remains a divided country. The unemployment rate in eastern states dropped slightly to 16.4 per cent in September, down from 17.6 per cent in July. The jobless rate is half that in the west, where the seasonally adjusted figure dropped by 23,000 to 8.6 per cent, down from 8.8 per cent in August.

Mr Weise said he was worried that January's looming three-percentage point VAT hike to 19 per cent would negatively affect the labour market. Experts already expect growth to drop from a forecast two per cent in 2006 to just one per cent next year as a result of the sales tax rise.

"The growth forecasts for 2007 will probably lead to a labour market standstill as a result," said Mr Weise.

The upcoming VAT hike has encouraged consumers to make large purchases now, boosting spending to a five-year high.