Orders fell by 2.2 percent on the month, figures from the Economy Ministry showed, following an upwardly revised gain of 3.6 percent in June.
The data wrong-footed analysts surveyed by Dow Jones Newswires, who had forecast a gain of 0.4 percent. "Orders growth continued to weaken after the extraordinarily strong orders dynamic early in the year," the ministry said in a statement.
"The result for the current month was depressed by significantly below-average large orders," added the ministry.
The drop was caused by a marked 3.7-percent dip in foreign demand. Domestic orders fell a more modest 0.3 percent. Nevertheless, taking the months of June and July together, which gives a better idea of the trend, industrial orders in Germany rose by 2.4 percent. The monthly drop was the biggest since February 2009, said Carsten Brzeski, economist at ING bank in Brussels.
"However, the drop is no reason to worry. Instead, we would characterise it as the expected correction after several strong months," said the analyst in a research note.
Heinrich Bayer, from Germany's Postbank agreed, saying: "All in all, despite the sharp decline compared to the previous month, the data do not suggest that the upturn in German industry will break down in the short term."
For his part, Alexander Koch from Unicredit termed the result an "expected technical correction."
Germany, the world's second-biggest exporter, has bounced back from a crippling recession in 2009 to register record growth in the second three months of the year, driven by increased demand for its goods around the world.
Berlin is expected to raise its forecast for output growth this year to around 3.0 percent, up from a previous estimate of 1.4 percent, according to media reports.
However, concerns of a double-dip recession in the United States, along with Chancellor Angela Merkel's €80 billion ($102 billion) austerity package passed last week, have raised fears of a slowdown in the second half of 2010.
Postbank's Bayer said: "Towards the end of the year, the upswing in industry could mark a pause."
Despite the recession, unemployment in the country remained relatively low at 7.6 percent of the workforce in August, with some 3.2 million people out of work.
Industry leaders are increasingly optimistic about the future as well, with business confidence levels rising to where they were before the financial market crisis.