The business climate index, a closely watched survey calculated each month by the Munich-based economic research institute Ifo, dropped to 102.4 points in April.
Economists polled by Thomson Financial News had forecast the index would fall to 104.3 after unexpectedly rising to 104.8 in March, weighed down by an economic slowdown and the strong euro.
"After a brief brightening at the beginning of the year, the survey results indicate a slower pace of business activity," Ifo chief Hans-Werner Sinn said. "The forces of a slowdown evident since mid-2007 have gained strength again."
Meanwhile Economy Minister Michael Glos unveiled the government's economic growth forecast for next year indicating the rate of expansion would decline to 1.2 percent in 2009 from 1.7 percent this year.
Germany's six leading economic institutes said in a report last week that they expected growth in 2009 of 1.4 percent.
The German economy had long seemed surprisingly resilient despite the slowdown in the United States, the international credit squeeze and a strong euro. But recent sentiment indicators and data suggest such factors are beginning to take a toll.
The biggest European carmaker, Volkswagen, said on Thursday that its business was suffering because of the rise of the euro against the dollar.
And rising energy and food prices also remain a concern, with Germany's annual inflation rate hitting 3.1 percent in March, well above the European Central Bank's target of below 2.0 percent. Data released last week showed a 4.2-percent jump in producer prices.
Sinn of Ifo told reporters on Thursday that the mood had blackened in the German manufacturing, wholesale and retail sectors in particular.
The business expectations sub-index, which measures the outlook for the next six months, declined to an indexed 96.8 points from 98.4 points in March. The business assessment index, which covers current conditions, dropped 108.4 points from 111.5 last month.
For its monthly survey, Ifo polls 7,000 companies about their assessment of current business and their expectations for the next six months. It is considered the most reliable barometer of the current state of the German economy and its outlook.
Germany had proved surprisingly resilient against the slowdown in the US economy this year. But the survey results released on Thursday indicated that executives are increasingly gloomy about their prospects.
Analysts from Commerzbank said the setback in business expectations had clouded for the first time in six months.
"Expectations are generally ahead of how the present situation comes to be viewed, so the economy can be expected to lose further momentum over the coming months, for a number of reasons," they wrote. "Exports will no doubt be hit by the stronger euro and weaker economic performance throughout Western Europe, and domestic demand is being eroded by high energy and food prices."
However economist Timo Klein of Global Insight in Frankfurt said it would be a mistake to see the Ifo survey too pessimistically.
"The data show that the fallout of the US subprime crisis for Germany's real estate sector is becoming apparent now, although it would still be wrong to say that German economic activity is about to dive sharply," he said.
An analyst at Capital Economics, Jennifer McKeown, held out the prospect that the gloom might prompt the European Central Bank to lower interest rates.
"The headline business climate index is still well above its long-run average of 96.5, suggesting that the slowdown in economic activity should not be too sharp," she said. "Nonetheless, it might not be too long before further falls in business confidence turn the ECB's attention from upside inflation risks to slowing growth."
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