The Ifo institute's closely watched business climate index up to 105.5 points this month from 104.7 points in November, the think tank said.
"The outlook for the months ahead continued to brighten," Ifo chief Hans-Werner Sinn said in a statement.
"Dropping oil prices and a falling euro exchange rate are seasonal gifts to the German economy."
Ifo calculates its headline index on the basis of companies' assessments of current business and the outlook for the next six months.
The data came on the back of a survey released Tuesday showing a sharp rise in investor sentiment in Germany.
"German business confidence confirmed the decent rebound of the economy in the final quarter of the year," said Carsten Brzeski of ING-Diba bank in Frankfurt.
He said that the worst crises threatening the economy - the Ukraine conflict and eurozone weakness - had eased of late.
But Brzeski added "complacency" undermining a drive for new economic reforms, Russia's economic woes and Germany's over-reliance on exports all posed risks.