Joblessness at 10.3% is a brake on consumer spending

The monthly index issued by the respected Ifo research institute dropped to 94.6 from 96 points in May.

"The latest survey results indicate that the cyclical recovery is not yet on a broad solid base," said Ifo president Hans-Werner Sinn.

Mr Sinn said the reading was "a disappointment for everyone".

"Let's wait another two months to make a real assessment," he said in an interview on CNBC television.

Still hopeful

But he insisted that the June reading, the lowest since September 2003, was "not a catastrophe".

"We should not overdo it...There still is a business upswing. I am still mildly optimistic that we will get decent growth this year in Germany, not enough growth to be really happy about it but we do expect substantial growth," he said.

Exporters are in a positive mood, but domestic demand remains sluggish because of unemployment, he said.

The EU's biggest economy has been experiencing stronger growth - but unemployment rose for a fourth month in May showing that improvements have yet to feed through to the job market. Joblessness is running at 10.3%.

But economists had expected business confidence to improve or hold steady in June.

"It's a real disappointment. To be honest I don't really understand it because other data are pointing upwards," said Ralph Solveen, an economist at Commerzbank.

Germany's growth was a faster-than-expected 0.4% in the first quarter of the year, helped by rising demand for exports. The economy contracted by 0.1% in 2003.