Recent data has painted a bleak picture of Germany's economy

Munich-based Ifo's confidence index fell from 93.3 in April to 92.9 in May, its fourth straight month of decline.

The news follows similarly weak German data from economic think tank ZEW and the Organisation for Economic Co-operation and Development (OECD).

Chancellor Gerhard Schroeder is facing increasing economic pressure ahead of a vote of confidence on 1 July.

If he loses the parliamentary vote, as is widely expected, it could lead to an early general election.

Joblessness

Voters punished Mr Schroeder's Social Democrats (SPD) at the polls in the key state of North Rhine-Westphalia on Sunday, amid disillusion with painful economic and welfare reforms that have so far failed to boost growth and curb mass unemployment.

Ifo's findings on the glum mood among German firms follows data on Tuesday from ZEW indicating German investor confidence had fallen to a six-month low.

Meanwhile, the OECD lowered its 2005 German growth forecast from 1.2% to 1%.

Germany's jobless total remains stubbornly close to the post war record of five million reached in March.

In Ifo's monthly survey, about 7,000 companies are asked for their views of the current business climate and their outlook over the coming six months.

Companies were feeling slightly happier about current conditions, but gloomier about longer-term prospects, Ifo president Hans-Werner Sinn said.

"An improvement in the economic situation in the coming months is not to be expected," he added.

The downturn surprised economists, who had predicted a modest improvement in the business outlook of German firms.