Ifo, the influential German economics research institute, said yesterday that war in Iraq was the likely cause of falling business confidence in western Germany this month.

Chief economist Mr Germot Nerb made the comments as the institute revealed that its main business climate index had unexpectedly fallen to 88.1 points from 88.9 in February.

Economists polled by AFX News, AFP's financial news subsidiary, had predicted that the Ifo index would remain unchanged in March, after it rose in both January and February.

Mr Nerb said the war "could well be a reason for the fall" in the main index and its subsidiary indices of current business conditions and expectations for the next six months.

The business assessment index of current conditions was at 79.2 points, down 0.4 from February, and up 1.8 from March last year. The business expectations index meanwhile stood at 97.2 points - down by 1.2 from February and by 8.9 from a year ago.

Based on a poll of around 7,000 company chiefs, the Ifo index is the nearest thing Germany has to a confidence barometer.

Three-quarters of responses had been received before the outbreak of war in Iraq last Thursday and had not been noticeably different from the quarter that came in afterwards, Mr Nerb said. But he added that "war was already in the air" before the first bombings and had most likely been factored into all responses.

Despite its negative findings for March, Ifo says it was not expecting German gross domestic product to contract in the first three months of 2003 - which would mean Germany was technically in recession after a second consecutive quarter of negative growth.