German business confidence has slipped for the seventh consecutive month, despite a half-point interest rate cut earlier this month.

The Ifo economic institute said its western German index had fallen to 87.1 in December, from 87.3 in the previous month.

The continuing fall in sentiment comes as the German government, facing weak growth and a widening budget deficit, has proposed increasing taxes and social contributions, as well as cutting spending.

Economists closely watch the Ifo survey because it gives an indication on future investment plans.

"The decline was the result of a clear worsening of the current business situation, whereas the expectations for the next six months turned upwards for the first time since May," Ifo President Hans-Werner Sinn said in a statement.

Long-term outlook improves

A breakdown of the figures showed the short-term outlook is poor, with a sharp fall from 79.0 last month to 76.8 in December.

Expectations are higher according to the six-month outlook index, with it rising to 97.9 points in December from 95.8 points.

Mounting fears over the sluggish euro zone economy, especially Germany's, prompted the European Central Bank (ECB) to cut its key interest rate by a hefty half-point, to 2.75%, earlier this month.

The Ifo index is based on a monthly survey of around 7,000 German firms.