The findings are in line with recent data which underscore that the German economy, the biggest in Europe and the eurozone locomotive, is on a roll thanks to boosts from exports and growing domestic support.
A string of strong figures has even revived talk of a new German economic miracle.
The Ifo economic research institute said its business confidence index climbed to 107.6 points from 106.8 points in September.
The widely-watched reading of sentiment had been expected to slip to 106.4 points according to analysts polled by Dow Jones Newswires.
But "the firms have once again given more positive assessments of their current business situation and their business expectations have improved," an Ifo statement said quoted president Hans-Werner Sinn as saying.
"The engine of economic activity is running smoothly," he added a day after the government raised sharply its full-year growth forecast.
"Is this the new German Wirtschaftswunder," ING senior economist Carsten Brzeski wondered in reference to the country's post-war economic miracle.
He concluded however that "it is not a miracle. It is simply an impressive success story."
Ifo's report contrasted with gloomy news on Thursday when data showed that activity across the 16-nation eurozone slumped to a 12-month low in October in both the manufacturing and services sectors.
Ifo's measure of business expectations for the next six months also rose to 105.1 points in October from 103.9 points in September, defying an average analyst forecast for a drop to 103 points.
"The only path of German business confidence appears to be up," UniCredit economist Alexander Koch commented.
"Seemingly unimpressed by the substantial weakening in global leading indicators and also by the recent euro strength, business activity continues to expand at a brisk pace," he said.
The Ifo institute surveys around 7,000 German manufacturing, construction, wholesale and retail companies each month to establish the widely followed index of business sentiment.
Germany now forecasts full-year growth of 3.4 percent, probably surpassing advances elsewhere in the eurozone, Japan and United States.
A pick-up in global trade has boosted the world's second-biggest exporter after China, while business investment and domestic consumption have begun to provide support for economic activity as well.
"The German economy did not suffer from any imbalances prior to the crisis, the government's crisis measures were well timed and targeted and the industry is benefiting from the global investment-led recovery," Brzeski noted.