The closely watched survey of around 7,000 firms in the key manufacturing, construction, wholesaling and retail sectors, climbed to 95.8 in January from
94.6 in the previous month, hitting its highest level since July 2008.
"The economic recovery is continuing at the beginning of the new year," Hans-Werner Sinn, the institute's president, said in a statement.
The result was better than analysts surveyed by Dow Jones Newswires had expected.
"Today's Ifo reading sets a new record. Ten consecutive increases have been unprecedented so far," commented Carsten Brzeski, senior economist at ING financial markets.
Reflecting the brighter mood in Europe's economic powerhouse, the German government last week revised up its forecast for output in 2010 to 1.5 percent from the 1.2 percent it had previously estimated.
In another boost to Germany, the government last week published a substantial revision to industrial orders data for November, saying orders had risen by 2.8 percent compared to October, rather than by 0.2 percent.
Nevertheless, there are still several clouds on the broadly sunnier horizon. A separate survey of financial market professions, by the ZEW research institute, fell for the fourth time running in January.
The institute's president, Wolfgang Franz, said Germans should brace for a "burdensome and long" path from economic recovery.
The country is also saddled with a mountain of debt and expects a record 85.8 billion in new borrowing this year. Last year, Germany suffered its worst economic recession since World War II, with output shrinking by five percent.
"Of course, it is still a long way to go before the pain of the drastic 2008-decrease will be fully cured. Nevertheless, the German industry is slowly but surely steering out of the slump," said Brzeski.