"German firms must prepare for the worst-case scenario of a very hard exit, anything else would be naive," BDI chief Joachim Lang said in a statement.
Britain's governing Conservative party is "at odds" with itself on Brexit strategy, leaving the outcome "completely open" in London-Brussels talks set to end in March 2019, the statement said.
"Whatever kind of Brexit there is, it will bring a significant number of legal, economic and business problems with it," Lang said.
The industry federation is making its own preparations, with a task force split into 10 teams hoping to head off "potential and acute dangers" for future trade between the two countries, he said.
Germany exported €116 billion of goods and services to Britain in 2016, and imported some €60 billion from there, according to figures published by the country's central bank, the Bundesbank.
And German companies are well-represented in Britain, employing around 400,000 people in the island nation.
Carmakers and other industries have warned that new barriers to trade - from customs levies to regulatory differences - could disrupt EU-spanning supply chains that see goods and components cross national borders multiple times before reaching buyers.
Lang's comments come as Prime Minister Theresa May confirmed her government was preparing for "every eventuality", including not reaching a deal by the 2019 deadline, in a gaffe-ridden party conference speech Wednesday.
The threat of walking away without agreement has been echoed by other ministers in her cabinet.
And the prime minister's own position is shaky after a disastrous snap election which left her Conservatives without an overall majority in parliament and foreign minister and Brexit hard-liner Boris Johnson snapping at her heels.
Amid the power games in London, Brexit talks have only inched forward in Brussels.
Chief EU negotiator Michel Barnier told European Parliament lawmakers Tuesday that negotiators had so far failed to achieve "sufficient progress" for leaders to authorise moving on to the post-2019 relationship.