Economists are warning that Germany's recovery may be weaker than expected. The IFO institute's index fell to 88.8 in August from 89.9 in July, the third monthly fall in a row.
Germany's economy shrank slightly in the last half of 2001 and grew by 0.3% in the first and second quarters of this year.
IFO economist Genot Nerb says: "We have a sign that the second half of this year will be weaker than many companies expected."
Mr Nerb says that if next month produces a similar drop, the institute may have to revise its growth forecast of 0.7% for the entire year.
He is not predicting that the German economy will slip into another recession.
Mr Nerb says: "There will be growth, but weaker than expected."
The sluggish economy and high unemployment are the top issues in the campaign leading up to national election on September 22nd.
Social Democratic Chancellor Mr Gerhard Schróder faces a tough race against conservative challenger Mr Edmund Stoiber, the governor of Bavaria.
The IFO index is based on a survey of 7,000 business executives, and measures the outlook of people responsible for making decisions on investment and expansion.