The biggest EU economy, home to three million people of Turkish origin, has repeatedly clashed with President Recep Tayyip Erdogan over civil rights and other issues, especially since a failed coup attempt a year ago sparked mass arrests.
After Turkey remanded in custody several human rights activists, Foreign Minister Sigmar Gabriel said that Germany - Turkey's top trading partner, number-two foreign investor and biggest source of tourists -- would launch a sweeping overhaul of bilateral relations.
German holiday-makers were urged to exercise "heightened caution" in Turkey, and Gabriel said Berlin would review investment aid and state guarantees and discourage German companies from doing business there.
"You can't advise someone to invest in a country where there is no legal certainty and even completely innocent companies are linked to terrorism," said Gabriel.
German business federation BGA, which represents exporters and wholesalers, predicted that "the uncertainty German companies already feel will now rapidly increase".
"Many companies have already put their investments on ice," said its spokesman Andre Schwarz.
"We must expect significant declines in exports if the measures being considered are implemented, and investments too will suffer."
The Federal Association of German Industry (BDI) warned that "the uncertainty of the past year is already causing more and more German companies to distance themselves from Turkey".
"Turkey is hurting itself."
News weekly Die Zeit has reported that Ankara accused large German companies of terrorism links, among them luxury car maker Daimler and chemicals giant BASF, claims dismissed as "absurd" in Berlin.
"We are going through a low point in German-Turkish economic ties," Economy Minister Brigitte Zypries told the Handelsblatt financial daily.
"If innocent German companies suddenly appear on 'blacklists' and are branded as terrorist supporters, this creates a climate that makes new business and investment in Turkey extremely difficult."
BDI chief Joachim Lang warned that "for German companies in Turkey, the uncertainty increases by the hour, with every new vague and unsubstantiated accusation".
Turkish Deputy Prime Minister Mehmet Simsek tweeted that "press reports that Turkey is investigating Daimler AG and BASF SE are completely false. We welcome German investors."
But the BGA said that, "given the current situation, it is certainly not advisable for any company to make investments. This is an escalation that we hadn't imagined and bitter for all involved.
"The loss of trust is enormous, and trust is the most important thing for industry."
More than 6,800 companies in Turkey, both German and Turkish, have received German equity investment totalling more than €13.3 billion since 1980, says the German embassy in Ankara.
Schwarz predicted that Germany would not be shaken if trade slows down.
He said Turkey ranked 15th among German export destinations, buying goods and services worth about €22 billion last year, mostly cars and parts, machines and chemical goods.
Turkish imports to Germany totalled €15.4 billion, mostly textiles and clothing, followed by cars and parts and food products.
German tour operators have already sharply cut flight and hotel packages for Turkey as many sun-seeking vacationers have headed for Greece and Spain instead.
Some 3.9 million Germans visited Turkey last year, down about one-third from 5.6 million in 2015, says the German foreign ministry.
The heightened travel advisory warned German citizens about risks in Turkey - especially being caught up in its turbulent politics and terrorist attacks - but it stopped short of urging travellers to avoid the country.