The confidence index compiled by the GfK institute fell to 2.1 points from 3.6 points in its previous survey, with an indicator of economic and income expectations dropping especially sharply.
"The positive momentum generated by the job market and the beneficial wage and salary increases compared with last year are consequently being demolished by inflation," GfK said.
In June, consumer prices in the biggest European economy rose by 3.3 percent in June on a 12-month basis, the biggest increase since December 1993. "Record price increases, triggered primarily by rocketing energy prices, are leaving consumers increasingly fearful of their purchasing power," GfK said.
Income expectations fell to their lowest level since November 2005, owing to "growing fears of a recession and the fact that the crisis in the financial markets seems far from over," it added.
With the euro's rise in value hampering Germany's export-led economy, the government had hoped that thrifty German consumers would begin to hit the stores owing to lower unemployment and substantial pay raises. But GfK said that "consumers will no doubt be putting the brakes on their purchasing in the belief that in the future, a large proportion of their household budget will be going towards energy costs."
UniCredit Markets economist Alexander Koch said Germany had seen "several consumer recessions" since the high-tech bubble burst, and recalled the results of a recent German business climate survey by the Ifo research institute that showed sentiment plunging to a 34-month low point in July.
"Continuing high pressure on the purchasing power as well as the darkening economic outlook, underscored by last week's plunge in the Ifo, clearly argue against private consumption becoming the required pillor in the second half of the year, with the next consumer recession already lurking around the corner!"
GfK's survey of some 2,000 consumers found that "the number of Germans worried about price rises has more than doubled within the space of one year." An indicator that measures consumers' propensity to buy lost a relatively modest 2.5 points from the previous survey, but was down 35 points on a 12-month basis at minus 26.2 points.
UBS analyst Martin Lueck commented that "a substantial recovery in consumer spending has now become very unlikely."
"Both sentiment indicators and hard industrial data have recently shown that a massive slowdown is underway," prompting the Swiss bank to forecast that Germany's economy would grow by around 2.0 percent this year and 1.0 percent in 2009.