MANNHEIM, Germany Morale among Germany's analysts and investors sank in November as the crisis in the euro zone pounded its top economy, which looks increasingly at risk of joining the region's periphery in recession.
Tuesday's unexpectedly gloomy survey from the ZEW think tank followed a run of domestic data showing the private sector contracting, business sentiment plummeting, jobless rates rising and industrial orders dropping.
"For now, the ZEW looks broadly consistent with economic stagnation in Germany," said Jennifer McKeown, senior European economist at Capital Economics.
"But we think that the economy will slide back into recession next year as the peripheral debt crisis intensifies and business and consumer confidence weaken further."
Third-quarter results from leading European companies mirrored the grim picture.
Germany's No. 1 utility, E.ON (EONGn.DE), warned of weakening power demand in Europe and said it may close plants, cutting its profit outlook for next year.
British mobile phone giant Vodafone (VOD.L) wrote down the value of its business in Spain and Italy by 5.9 billion pounds ($9.4 billion) and lowered its cash flow forecast as recession-hit southern Europeans cut back on mobile usage.
Seeking to calm unease on markets about the spreading crisis on the euro zone's periphery, ECB President Mario Draghi unveiled a new bond-buying programme in September allowing for potentially unlimited interventions for struggling states.
No country has yet chosen to tap the programme, which comes with conditions attached, and with concern growing about the burden of keeping the region's debt-scarred periphery afloat, the main reading from the ZEW monthly poll found economic sentiment fell to -15.7 from -11.5 in October.
That came well below the consensus forecast in a Reuters poll for -9.8 and sent the euro to a fresh two-month low against the dollar while European stocks extended losses. <ID:L5E8MD41C>
Jittery markets also digested an open clash between euro zone finance ministers and the International Monetary Fund about how to bring Greece's debt down, which delayed the release of a 31 billion euro aid tranche vital to keeping Athens afloat.
"With the (European Central) Bank yet to purchase any bonds and worries about Greece escalating again, investors seem to be losing what little faith they had regained," McKeown said.
Recession-hit Italy's two biggest banks, Intesa Sanpaolo (ISP.MI) and UniCredit (CRDI.MI) both set aside billions of euros against risky loans, though they delivered higher than expected profits and boosted their capital bases.
Germany long appeared relatively immune to the region's economic troubles as private consumption remained robust at home and its manufacturers benefited from healthy demand in markets beyond Europe.
But as the euro zone edges back into recession, Germany's economy has taken a turn for the worse too.
Gross domestic product data due on Thursday is expected to show growth in Germany slowed to 0.2 percent in the third quarter from 0.3 percent in the second as firms unnerved by the crisis postponed investments and lost business abroad.
ZEW suggested weakening economic sentiment could be due to disappointing leading indicators such as industrial orders, which dropped by 3.3 percent on the month in September - a worrying sign given that manufacturing accounts for a third of German GDP.
The weak economic environment is also hitting German companies in other sectors.
Commerzbank (CBKG.DE) missed third-quarter profit forecasts, and media conglomerate Bertelsmann BERT.UL and its RTL Group AUDK.LU warning the crisis in Europe would weigh on earnings this year as firms spend less on advertising.
"Prevailing recessionary developments in the euro zone impact the German economy via foreign trade and a lack of confidence. This is likely to be a burden for economic growth in Germany during the next six months," ZEW President Wolfgang Franz said.
That tallies with the Economy Ministry's view that growth will probably slow in the fourth quarter of this year and the first of 2013.
Germany, traditionally an export-driven economy, sends around 40 percent of its shipments to partners in the single currency bloc and around 60 percent go to the whole European Union, so a downturn in the region can have a big impact.
Last week data showed German exports slid by 2.5 percent in September, the fastest pace since late last year, due to declining demand in the euro zone. Imports fell 1.6 percent.
Many economists expect German GDP to contract in the fourth quarter for the first time since the end of 2011, though healthy consumer appetite and a robust jobs market should help Germany to avoid a recession, defined as two quarters of contraction.
Christian Dick, an economist at the think tank, said he did not expect Germany to experience a "sharp recession as we see in the other European countries."
Others took a more optimistic view.
The head of Germany's BGA trade association, Anton Boerner, said on Tuesday both exports and imports would rise to record levels next year as global trade picked up to offset the downturn in the euro zone.
ZEW's gauge of current conditions slipped to 5.4 from 10.0 in October, coming in below the consensus forecast in a Reuters poll for a reading of 8.0.
The index was based on a survey of 263 analysts and investors conducted between Oct 29 and Nov 12, ZEW said.
(Reporting by Sakari Suoninen and Victoria Bryan; Writing by Michelle Martin and Paul Taylor, Editing by Gareth Jones and John Stonestreet)