In the closely watched business climate index, calculated each month by the Munich-based economic research institute Ifo, the March reading climbed to 104.8 points from 104.1 points in February.
Economists polled by Thomson Financial News had forecast the index would fall to 103.4 points.
"The results indicate that with the beginning of the year the German economy has gained strength," Ifo president Hans-Werner Sinn said in a statement. "The outlook for the coming six months has also brightened somewhat," he added.
For its monthly survey, Ifo polls 7,000 companies about their current business conditions and their outlook for the next six months. The survey showed relative optimism among German firms on both scores.
The business expectations sub-index, which measures the outlook for the
next six months, rose to an indexed 98.4 from 98.2 in February, while the six-month business assessment index showed a stronger gain to 111.5 from 110.3 last month. Analysts had expected the former figure to fall to 97.6 points and the latter to ease back to 109.5 points.
The climate indicators for the manufacturing and construction sectors both rose as well, while that for retailing fell slightly following a strong rise in February, Ifo said.