The Ifo institute's gauge of German business confidence unexpectedly fell to its lowest level in almost two years in May, as a drop in expectations outweighed an improvement in the assessment of current conditions.
Ifo's closely-watched business climate index, based on a monthly survey of around 7,000 firms, declined for a fourth straight month to 92.9, the lowest since August 2003, from 93.3 in March, the Munich-based think tank said today.
Economists polled by Reuters last week had forecast the index would edge up to 93.5.
"The surveyed firms again reported less favourable business expectations for the coming six months. Appraisals of the current situation have stabilised, however," Ifo president Hans-Werner Sinn said in a statement. "An improvement in the economic situation in the next months is not to be expected," he added.
Mr Sinn said the business climate in manufacturing worsened as a slight improvement in current conditions was more than offset by worsening expectations. Optimism among manufacturers about the export outlook also weakened.
Three straight declines in the headline index, one of Europe's most closely-watched economic indicators, typically signal a downturn in Europe's biggest economy, analysts say.
A separate Ifo gauge of current business conditions rose to 93.4 from 93.1, while a measure of expectations for the next six months fell to 92.3 from 93.6. Analysts had predicted an unchanged reading in current conditions and a gain in the expectations component to 94.0.