The retail sector has shown signs of recovery

Research institute Ifo said its business index rose to 93.3 points from 92.9 points in May.

The retail sector index hit its highest level since October 2003. Construction was the only sector not to improve.

The weakening euro had proved to be good news for exports, analysts said, adding that news of a September general election had also improved confidence.

The latest rise in (oil) prices has probably not yet been fully reflected in the Ifo index, therefore there is the risk of a fall in the next few months Juergen Michels, Citigroup

The euro has fallen by about 11% since the beginning of the year. By Monday, it was trading close to the $1.20 level - approximately four cents lower than at the time of the previous Ifo survey.

Oil drag

However, the research institute said it was "too early" to say whether the country's economy was set to pick up in coming months.

Analysts warned rising oil prices could affect confidence in coming months, as the survey was carried out in early June yet crude only broke through the $60 a barrel level at the weekend.

"The oil price is still a drag for the economy - for both exports and domestic demand," said Juergen Michels at Citigroup.