Confidence among retailers has worsened

Despite continued financial market volatility, the Ifo Institute said that business confidence had picked up for the first time in six months.

The Munich-based group said its business climate index rose modestly to 104.2, up from 103.9 in October.

However, separate data showed on Tuesday that German inflation is now at a 13-year high.

The preliminary official figures indicated that inflation rose 3% this month, the highest level since 1994, and a rise from 2.4% in October.

This will inevitably concern the European Central Bank, which has responsibility for controlling inflation across the eurozone.

False dawn?

The IFO Institute's monthly survey measures the current economic climate based on the responses of about 2,000 businesses.

"The companies have assessed their current situation more positively than in October but are somewhat more cautious regarding the six month business outlook," said the group's president Hans-Werner Sinn.

"The results indicate that the currently strong economy is only gradually cooling."

The data left many analysts bemused as to why confidence should pick up in the face of the rising possibility of a US recession, higher eurozone interest rates and a stronger euro, which is making exports more expensive.

David Brown, chief European economist at Bear Stearns, told Dow Jones Newswires the slight pick up was a "false dawn" and did not signal the end of the woes affecting the global economy rooted in the US sub-prime housing market.

"The financial market crisis is far from over, the credit crunch is hitting some hard, oil prices remain high and the strong euro continues to hurt business confidence," he said.

Separately, European Central Bank governing council member Nicholas Garganas said he expected the eurozone to grow "quite strongly" over the next three months.