The concerns of the companies are affecting their workers

Research group Ifo's confidence index fell to 97.8 from 98.8 in October.

The worsening of sentiment was unexpected and comes after two months of improvement that had fanned optimism about a continuing economic recovery.

A leading central banker had earlier warned that Germany now faced a crisis of confidence and needed "courageous reform" of its public spending system.

"There is no confidence in the future," Bundesbank vice president Juergen Stark said during a seminar in Tokyo.

"There is a fear of increasing unemployment, there is no confidence in the sustainability of public finances and no confidence in the ability of policymakers to solve the problems," Mr Stark was quoted by the Reuters news agency as saying.

Moderate recovery

The Ifo was less pessimistic and said that "despite this decline, the Business Climate Index is still above the September level".

"The latest data confirm a continuation of the current moderate economic recovery," it said.

Germany has been showing signs of pulling out of a slowdown that hampered efforts to cut unemployment and boost corporate earnings.

Germany is rolling out the big guns to boost the nation's confidence

A report earlier this month showed that the economy grew at a faster-than-forecast rate of 0.6% in between July and September, up from 0.2% in the previous quarter.

The rise was largely down to strong export growth, and the period also saw increased investment by businesses.

'More sceptical'

The main concern for analysts is that domestic demand remains fragile, with consumers unwilling to spend too freely because of concerns about job security.

Some of Germany's largest firms have been pushing through labour reforms and job cuts, claiming that unless changes are made then they will not be able to compete in international markets.

"In retailing the business climate worsened noticeably in November, with both more sceptical assessments of the current situation as well as the six-month outlook," the Ifo said.

In an effort to boost confidence, Germany launched an add campaign in October to reminding people of the country's success stories and most famous faces, including carmaker Porsche and scientist Albert Einstein.

Bernd Weidensteiner, an analyst at DZ Bank, said that the drop in retail sentiment "doesn't necessarily bode well for the Christmas sales, which is what other surveys had been suggesting as well".