Foreign exchange traders sold the euro on the news, and the single currency fell to $1.4321 in London from $1.4382 late on Monday.
The ZEW indicator of German economic sentiment fell more steeply than forecast to an indexed 47.2 points, the the lowest level since July 2009.
"The assessment of the financial market experts suggests that we will see an economic recovery in 2010 at best, but not a clear economic upswing," a statement quoted ZEW president Wolfgang Franz as saying.
"The way out of the recession is burdensome and long," he added.
Analysts polled by Dow Jones Newswires had expected the German financial sector barometer to just edge lower to 49.8 points.
The index remained well above its historical average of 26.9 points, but "according to the experts, the automobile and consumption sector is likely to develop downwards in the next half year," the ZEW statement said.
ING senior economist Carsten Brzeski said however that the latest reading showed only that experts had a clearer idea of the challenges facing Germany as it pulls out of its worst recession since the Second World War.
"The initial enthusiasm after the end of the recession last year has made way for more realism," Brzeski said. "The German economy is now entering calmer waters."
Germany should post modest, possibly uneven growth in 2010, though a Finance Ministry spokesman said Monday that economic activity could expand by 1.5 percent this year, an upward revision from the previous 1.2 percent forecast.
The government has cut it 2010 jobless forecast meanwhile to around 3.7 million from a previous estimate of 4.1 million, the Handelsblatt business daily said on Tuesday.
In its measure of the current situation, ZEW said an assessment by investors improved in January by four points to minus 56.6 points, the eighth consecutive rise and the highest level since November 2008.