Ifo Institute's closely-watched business confidence index had fallen to 108 points in July, down significantly from a reading of 109.7 points in June, the German economic think tank announced Friday.

The third consecutive monthly drop in the index was caused by uncertainty over tougher sanctions against Russia and the flaring up of the Middle East conflict, Ifo President Hans-Werner Sinn noted in a statement.

"Geopolitical tensions are weighing on German businesses," he said.

Ifo's Business Confidence Index is sampled from responses of about 7,000 company heads and an important barometer gauging the health of the German economy.

The institute's cycle analyst Klaus Wohlrabe told the news agency Reuters that the downturn came as a surprise but didn't mean a change of trend toward a significant cooling in the German economy. He added, however, that Ifo's full-year growth estimate, recently revised upward from 1.9 percent to 2 percent, was now coming under pressure.

Wohlrabe also noted that domestic business conditions remained intact and would continue to prop up the economy as a whole.

Consumers undaunted

Also on Friday, the GfK market research group released its forward-looking Consumer Climate Index, showing that German consumers remain in upbeat moods.

"Despite the escalation in the situations in Israel and Ukraine, German consumers continue to be exceedingly optimistic this summer," GfK said in its report, which is based on responses from about 2,000 households.

As a result, GfK's forward-looking Consumer Confidence Index rose to 9 points for August from 8.9 points in July. Positive moods were fuelled by rising income expectations, GfK said, adding that Germany's victory in the football World Cup in Brazil earlier this month had no tangible effect on consumer sentiments. Nevertheless, Germans' willingness to spend remained at a high level.

However, analysts expect German economic activity to slow somewhat in the second half of the year, coming down from exceptionally strong growth of 0.8 percent in the first quarter of 2014.

uhe/nz (AFP, Reuters, dpa)