The key Ifo index of German business confidence slumped to 94.9 in February from January's 97.5, knocking as much as half a cent off the euro and raising pressure on the ECB to follow Federal Reserve rate cuts.
Ifo said today a sharp fall in the index for February showed Europe's largest economy needed an interest rate cut.
Mr Gernot Nerb, in charge of Ifo surveys, said if the Bundesbank was still in charge of German monetary policy instead of the European Central Bank, it would probably cut interest rates.
The once-mighty Bundesbank surrendered its control over German interest rates to the ECB at the launch of the euro in 1999.
German growth slowed to 0.2 per cent in the final quarter of last year as an abrupt slowdown in the US economy hit the demand for its exports and dented business confidence.
Some private sector economists see German growth slipping well below two per cent this year from 3.1 per cent in 2001.
But Mr Nerb said it was premature to declare a recession red-alert. "I would not say recession, but this is a clear signal that the downswing has started, is not over and could last a couple of months," Mr Nerb said.