Attempts to reform the German economy have hit vocal opposition

The monthly ZEW Institute index fell to 63.4 points in March from 69.8 in February, the second drop in a row.

ZEW said that a lack of progress on key economic reforms and a sputtering recovery were weighing on sentiment.

However, analysts said that even though the drop was a surprise, confidence was still buoyant and the index was well above its historical average of 35.

'Still unresolved'

Demand for exports is still strong, helping to drive Europe's largest economy and offset sluggish domestic consumer demand.

There are still significant problems. Unemployment has remained stubbornly high and close to 12%.

"The harsh economic reality, with its big reform plans still unresolved, increasingly seems to influence economic expectations," said Wolfgang Franz, president of ZEW.

Alexander Koch of HVB Group said that: "It is quite likely that we have now seen the peak in the current business sentiment cycle."