German business confidence rose in October to the highest level for more than a year, a key survey by the Ifo research institute showed yesterday.

The Ifo index gained 0.6 points from September to 91.9, the highest level since September 2008, when the indicator stood at 92.7 points.

Analysts polled by Dow Jones Newswires had expected a seventh consecutive rise to 92 points as the biggest European economy pulls out of its worst recession since World War II.

"The economic recovery continues hesitantly," a statement quoted Ifo president Hans-Werner Sinn as saying.

The German economy nonetheless still faces potential hurdles stemming from rising unemployment, a possible credit squeeze and the euro's gain in value against the dollar.

Ifo polls around 7,000 companies each month in the manufacturing, construction, whole-sale and retail sectors for its index. In addition to the headline figure, it provides an indicator of business leaders' assessments of the current economic situation and their expectations for the next six months.

The current situation index edged up by 0.2 points to 87.3 in October, while the six-month outlook gained 0.9 points to 96.8, its highest level since May 2008, the statement said.

In manufacturing, those polled were more confident than in September with regard to the coming six months in particular, and "the firms are planning to slow down the pace of staff reductions somewhat," Ifo said.

Retailers were more pessimistic on the other hand about both their current situation and the six-month outlook.

The German government has revised its 2009 growth forecast higher meanwhile, but still expects the economy to contract by around five percent.

Economic activity should increase next year by 1.2 per cent, Economy Minister Karl-Theodor zu Guttenberg told reporters last week, a much more positive forecast than the 0.5 per cent given six months earlier.

"The third quarter was a good quarter for the German economy. Probably even an excellent quarter," ING senior economist Carsten Brzeski commented yesterday.

"The economy has benefited from unique multiple tailwinds as the pick-up in global activity, stock rebuilding, still stimulus-driven private consumption and structural tax relief from the government's stimulus package all hit in at the same time."