The index points to a bright year ahead for Germany's economy

Research group Ifo's December survey of 7,000 firms saw its business climate index beat forecasts, rising to 99.6, up from 97.8 in November.

Firms in the manufacturing, wholesale, retail and construction sectors all reported an improved business climate.

Despite a slight fall last month, the index has risen steadily since late Spring.

It is now at its highest level since hitting 100 in August 2000.

'Weakest link'

Ifo said that business confidence had been helped by the European Central Bank's message that the recent interest rate rise, the first since 2000, was a one-off.

"The stronger than expected surge in the Ifo business sentiment indicator is a great boost for recovery expectations and a positive sign that stronger growth it finally coming back on track," said Bear Stearns economist David Brown.

"The weakest link in the German recovery remains the German consumer and it is still going to take a while for improved business confidence and stronger employment trends to percolate down into stronger consumer demand."

Germany's chronic high unemployment problems are getting better, but the jobless rate still stands at 10.9%.

The German government predicts the economy will grow by 0.8% this year, rising to 1.2% in 2006.

Much of the growth comes from the country's booming export markets, particularly in the Far East.