German economic growth has been based on export growth

Investors were more pessimistic than in May, but the outlook showed "good economic perspectives", said the Centre for European Economic Research.

But analysts said the drop showed the fragility of German recovery and warned against further interest rate rises by the European Central Bank (ECB).

The ECB raised rates in June to 4% - their highest level for six years.

'Ominous'

"The German recovery needs some positive support, not brow-beating from the European Central Bank with higher rates," said David Brown, an economist with Bear Stearns.

The fall follows other recent data that showed a drop in German production and lower employment levels - another example of Germany's patchy recovery.

The drop in German business sentiment is "an ominous reminder that the German recovery is still skating on thin ice", said Mr Brown.

On the other hand, a wider trend for export growth and revived consumer spending after a value-added tax rise in January have raised economic forecasts for the year.