Hopes for Germany's economic recovery have risen after business leaders reported growing optimism over prospects.

The much-watched Ifo business climate index posted a stronger-than-expected rise, climbing to 91.5 points this month from 90.5 points in April.

The index, which is based on a monthly survey of 7,000 firms, had been expected to reach only 90.8 points this month.

The news will help raise confidence over the outlook for Germany, Europe's biggest economy, which has recently begun to pull out of recession.

Early days

Monday's figure was well received by investors, helping both shares and the euro higher.

Hans-Werner Sinn: Retail climate "deteriorated"

"It's a pretty good number and it is euro positive to the extent that it shows the economic picture improving," said Shahab Jalinoos, currency strategist at UBS Warburg.

But Ifo economist Gernot Nerb warned against reading too much into the survey's findings.

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

The economy, facing rising unemployment and hit by a strike earlier this month, was not strong enough yet to support calls for an increase in eurozone interest rates.

"We're at an early stage, there's still considerable risks," Mr Nerb said.

The German economy grew 0.2% in the first three months of 2002, mainly thanks to a strong rise in exports, official figures have said.

Retail challenge

Ifo, an economics institute, credited the rise in business confidence largely to a revival in manufacturing.

"More favourable reports from manufacturing industry and wholesalers contributed to the improvement," Ifo president Hans-Werner Sinn said.

Rising unemployment meant the recovery had yet to feed through to German High Streets, Ifo said.

"The still cool climate in the retail and construction sectors deteriorated again slightly," Mr Sinn added.

In Frankfurt, the key Dax stock index stood 1.4% higher at 4,967.3 points in late morning trade.

In London, the euro stood marginally higher at $0.9204.