German doles queues grew longer in July, according to new data released yesterday, delivering a setback to government hopes that an economic upswing was on the way.

Germany's seasonally adjusted unemployment rate rose by 7,000 to 4.408 million, the first rise in three months and a surprise to analysts who were expecting a drop.

The unadjusted jobless rate, more politically sensitive in Germany, rose to 10.4 per cent, with 4.352 million out of work, some 305,000 more than a year ago.

"The current seasonally adjusted rise is still less than what one might have expected in the economic situation," said Mr Florian Gerster, head of the Federal Employment Office in Nuremberg.

"The general economic weakness is continuing to weigh on the labour market. A fundamental improvement is not yet in sight." Average unemployment this year is likely to reach 4.5 million, said Mr Gerster.

The data show that while average unemployment in western states is 8.3 per cent, the average jobless rate in eastern states is more than double that at 18.5 per cent.

Mr Wolfgang Clement, the German economics and labour minister, said he was optimistic that the jobless total would not rise above five million this winter as feared.

"Economically we have passed the trough and the signs of growth are increasing. But the impulse is still too weak to work as a relief on the employment market," he said.

His optimism was not shared by one of Germany's leading economic institutes, which issued a report yesterday saying that Germany probably fell into recession during the second quarter of the year.

The DIW institute said that the euro zone's largest economy shrank 0.2 per cent in the last two quarters.

The government will publish its own second-quarter gross domestic product (GDP) data next week.

"There were no visible signs of a recovery in the second quarter. The economy's pace won't pick up during the third quarter," said the DIW.

The institute said an economic upswing could be expected at the end of the year at the earliest.

Tax cuts averaging 10 per cent for next year would have a positive effect on economic growth, but concerns about the as-yet unclear financing could limit the positive effect.