German investors are struggling to look on the bright side

Investor confidence dropped to minus 37.2 points in December from minus 32.5 points in November, according to the ZEW institute's index.

The US housing crisis and credit crunch have ignited concern about the global economy, making investors wary.

The US central bank is likely to cut rates later, further boosting the euro, making eurozone exports uncompetitive.

The December rating was the lowest since January 1993, the institute said.

"The financial market experts see clear risks for economic growth in important industrial countries, particularly in the United States," ZEW said in a statement.

"This impairs the export prospects of the German economy. The strong euro has furthermore increased uncertainty for German exporters," it added.

An announcement on US interest rates is expected from 1915 GMT. Lower US rates will make the dollar less attractive and increase the appeal of the euro to investors.

The Fed has cut rates twice already this year and its looser policy has been replicated elsewhere, with the Bank of England cutting interest rates last week.

Inflation bind

Inflation pressures prompted the European Central Bank to keep rates on hold at 4% last week.

With the ECB caught between a need to clamp down on inflation and a desire to boost growth, the road ahead looks tricky, says Bear Stearns' economist David Brown.

"German business expectations are falling into a black hole as confidence continues to implode. Business optimism is now running at its weakest level in 15 years," he said.

"The worry is that business and consumer confidence is now moving lower in tandem. This bears all the hallmarks for a hard landing next year."