Germany has weathered the eurozone debt crisis well and looks set for more strong growth in 2011 as low interest rates boost business investment.
Ifo's closely watched reading of German business sentiment climbed to 109.9 points in December from 109.3 points in November, a seventh rise in a row. Analysts had expected a slight increase to 109.4 points.
A sub-index of expectations for the coming six months also set a new record, climbing to 106.9 points from 106.3 in November.
The strongest rise was seen in retail sentiment, with that index jumping from 13.4 to 24, "reflecting bouyant expectations among retailers for a very strong holiday sales period," Barclays Capital analyst Frank Engels said.
Consumption has long been the weak link of German economic activity but falling unemployment and higher wage prospects have given household sentiment a substantial lift.
"It would be an understatement to say that retailing is optimistic," UniCredit economist Andreas Rees noted.
Sentiment in the manufacturing and construction sectors edged lower but Ifo said that "stronger stimulus is expected from exports and firms are planning to hire additional staff."
The economy should thus start 2011 "at full throttle as it is taking the next stage towards a self-sustained recovery," ING senior economist Carsten Brzeski said.
Ifo surveys around 7,000 German manufacturing, construction, wholesale and retail companies each month to establish the index of business sentiment.
"Following an increase in exports, investment in particular has been responsible for the upswing and the outlook is now even good for consumption," Ifo president Hans-Werner Sinn said.
The latest survey underpinned expectations that Germany will post record growth this year despite financial uncertainty fueled by the eurozone debt crisis.
The German central bank has estimated 2010 growth at 3.6 percent, the strongest pace since the country's reunification in late 1990.
"Unusually low interest rates and the moderate level of the euro are certainly supportive factors," said IHS Global Insight senior economist Timo Klein.
Rees added that "consumer spending and - very likely - investment activity are taking over" from exports as drivers of economic growth. That might help Berlin respond to European leaders who have criticised Germany as an exporter benefiting from global growth while its neighbours struggled.
The UniCredit economist said stronger German consumption should help eurozone partners and concluded that the latest Ifo survey was "good news for Germany and - yes - the rest of Europe" as well.