(Refiles to change headline to Update 3, not Update 2)
* Ifo at 3-yr high; biggest jump since German reunification
* Buzz from World Cup, warm summer weather cited
* Analysts upbeat on third quarter
* Survey offers relief to under-fire Merkel coalition
* Euro rises vs dollar after data
(Adds details, public reaction)
By Dave Graham
BERLIN, July 23 German business sentiment leapt
by a record margin in July to reach its highest level in three
years, fuelled by a World Cup buzz that boosted consumer
spending in Europe's largest economy, a survey showed on Friday.
The unexpected jump, which boosted the euro, pointed to
strong economic growth in the current quarter, though if the
German recovery continued to be export-led, weaker countries in
the single currency zone might suffer, analysts said.
The Munich-based Ifo economic think tank said its business
climate index, based on a monthly survey of some 7,000 firms,
rose this month to 106.2 from 101.8 in June.
This lifted the indicator to its highest level since July
2007 and was way above the mid-range forecast in a Reuters poll
of 42 economists for a dip to 101.6.
"The German economy is in a party mood," Ifo said. "The
increase is the largest since German reunification (in 1990)."
Graphic comparing German IFO and PMIs
The euro reversed early declines after the data was
published, rising to the day's high of $1.2939 according to
Reuters data, from around $1.2884 before the announcement and
extending gains to $1.2947 by 1045 GMT.
September Bund futures were six ticks higher at 128.96.
The German data followed reports showing corporate sentiment
in France and Italian consumer morale were unexpectedly robust
in July, raising hopes for Europe's economic outlook, although
that was tempered by an unexpected drop in French consumer
spending on manufactured goods in June.
Recent indicators show the German economy has gained
strength since a winter freeze that dampened a recovery from the
country's sharpest post-war recession last year.
However, economists were astonished by the extent to which
Germany has so far resisted the impact of a sovereign debt
crisis in Europe and planned austerity cuts that followed it.
"These numbers are just insane," said Ralph Solveen, an
economist at Commerzbank. "The economy is really growing
strongly. We'll see a strong growth rate in the third quarter."
Germany enjoyed a strong run to take third place at the
soccer World Cup, energizing millions of people across the
country in June and July, and creating a feel-good mood that
raised hopes of a pick-up in consumer spending.
On the streets of Berlin, there was cautious optimism.
"I'm not afraid of losing my job any more," said train
mechanic Tobias Burgmann, 46. "I had to work shortened hours for
a bit, but my employer said I can go back to full-time soon."
The jump in business optimism should also offer solace for
Chancellor Angela Merkel, whose centre-right coalition has
slumped to an all-time low in opinion polls despite the fact
unemployment has been falling for a year.
Merkel's divided coalition lost control of the upper house
of parliament this month and if her fortunes fail to recover
soon, she risks fresh embarrassment next spring in a round of
state elections that could weaken the government further.
Germany's manufacturing sector, a key driver of growth, has
powered the country's pick-up, with engineering orders posting a
record increase in May, boosted by vibrant demand from abroad
and a more favourable euro exchange rate.
Still, a flash estimate of a poll of purchasing managers in
manufacturing showed signs that foreign demand eased down a gear
in July, and some economists said the positive impact of the Ifo
data should not be overstated.
Analysts have long hoped Germany could steer its economy
away from reliance on manufacturing exports towards
broader-based demand, and July's Ifo data offered a ray of hope.
An Ifo gauge of morale among retailers broke into positive
territory for the first time since the beginning of 1997.
Overall, the Ifo data showed a measure of current business
conditions rose for a fifth straight month to 106.8 from 101.2
in June, while expectations rose to 105.5 from 102.5.
Some observers were sceptical, however.
Jennifer McKeown, an analyst at Capital Economics in London,
said unless domestic demand showed signs of lasting improvement,
the euro zone would not profit much from the upturn.
"Indeed, if Germany is simply taking a greater share of
world exports than in the past, the peripheral economies might
be losing out," McKeown said.
(Additional reporting by Christian Kraemer, Annika
Breidthardt, Brian Rohan, Erik Kirschbaum, Sarah Marsh and Max
Chrambach; Editing by John Stonestreet and Susan Fenton)