Germany's key economic barometer gave fresh hope yesterday that the euro zone's largest economy was poised for recovery.

But the influential Ifo economic institute warned that it was too early to tell when Germany would recover fully after expanding by only 0.6 per cent last year.

"It's the beginning phase of a recovery but you can't say from this data whether it will be a moderate recovery," said Mr Gernot Nerb, Ifo chief economist, in Munich yesterday. "It's too early at this stage."

But the euro failed to capitalise on the rise, falling to a new six-month low of $0.8574 (€0.995), before recovering somewhat to $0.8594, from $0.8655 overnight. Economists say investors are betting against the currency because the euro-zone economy is still seen as a poor relation to its US counterpart. The Ifo business confidence index rose for the third month in a row, reaching 86.3 points in January, up from 85.8 points in December.

The index, seen as an indicator of growth prospects in the rest of the euro zone, is based on a survey of more than 7,000 firms in western Germany.

Managers are asked to rate, from 100 points, their current business situation and their expectations and investment plans for the next six months.

Yesterday's report said German business expectations for the next six months rose 3.9 points since November.

For the first time, the report assesses confidence in the current month instead of the previous four-week period.

The Ifo report is likely to reduce the chances of an interest rate cut in the near future, however, as it supports the ECB's assessment that the euro-zone economy will recover in the second half of this year. "The indicators, like the Ifo reading this morning, show there is a turnaround in Europe and that a further rate cut is by no means guaranteed," said Mr Michael Schubert, an economist at Commerzbank.

Signs of growing business confidence will be welcome news to the German finance minister, Mr Hans Eichel, when he presents his economic forecast for 2002 to the cabinet tomorrow. His forecasts are framed around the hoped-for recovery later this year.

With low interest rates, falling inflation and low oil prices, "the time is ripe for an upswing", writes Mr Eichel in the forecast.

The German economy grew by just 0.6 per cent last year, the lowest level of growth for eight years. The Bundesbank estimates that the German economy, accounting for a third of the eurozone GDP, had fallen into recession by the end of last year.

The unexpectedly positive business outlook in Germany was not enough to stop the euro falling below $0.86 yesterday.