The Federal Statistics Office estimated a 0.6-percent decline in consumer prices this month compared to one year ago based on data compiled from six of Germany's 16 states.
The figure compared to a 0.1-percent year-on-year rise in prices in June. Analysts polled by Dow Jones Newswires had forecast a less steep decline of 0.3 percent.
The statistics office said in a statement that the last time the price level for goods and services declined in Germany was in March 1987 when it fell 0.3 percent.
Over the course of the year between April 1986 and April 1987, the inflation rate fluctuated between zero percent and minus 1.0 percent.
"At that time, as now, the reason lay in a sharp decline in prices for heating oil and fuel compared to the year before, which reached a record high in July 2008," the statement said.
Consumer prices fell 0.1 percent this month versus the month before.
UniCredit Research economist Alexander Koch said the current rebound in oil prices would help to turn the trend around in the coming months.
"The headline (inflation) rate should remain in negative territory in the short term," he said. "But the impending reversal of the energy price base effect and the stabilisation of selling price expectations in the retail sector should lead to a return clearly above zero already towards the end of this year."
London-based Capital Economics said the news would buoy German consumers as they face the worst economic downturn since World War II.
But it warned that the decline in prices could cause serious, if temporary, problems if the recession drags on.
"The severe economic downturn could yet prompt a more damaging, sustained period of deflation in the medium term," it said in a statement.
A closely-watched monthly consumer confidence survey rose for the fourth consecutive time this week, indicating that notoriously frugal German consumers were relatively bullish in the crisis.
The GfK institute's index for August released Monday rose to an estimated 3.5 points - its highest level in 14 months - from a revised 3.0 points in July, raising hopes for a consumer-led boost to the ailing economy.
And Friday, a key survey by the Ifo institute measuring the mood among German firms rose for the fourth month running in July.
Nevertheless, the government still sees Germany - one of the world's top exporters - shrinking by a record six percent this year.
The statistics office will publish definitive price data for July on August 11.