The Ifo index soared to 105.4 points in March -- the highest reading since April 1991, the year after German unification, and up from 103.4 points in February. The February reading was revised from 103.3 points.

"The economic recovery is continuing to stabilize," said the head of Munich-based Ifo institute, Hans-Werner Sinn. He added that optimism had spread through most sectors of the economy and that the most marked improvement had been registered in the poorer former communist eastern states.

Analysts cheered the news as ushering in a robust economic turnaround.

"After five very lean years, Germany seems to be heading for a serious economic upswing," said Holger Schmieding, an economist with Bank of America. "Taken at face value, the Ifo projects a cyclical boom and not just a tame upturn."

Important for Europe

Edward Teather of UBS Investment Research in London said the Ifo index had broader positive implications for the euro zone as a whole.

"The strength of German business confidence implied by the Ifo in recent months has clearly outstripped that of the other large euro-area economies," he said. "However, while the acceleration in German growth may not be repeated in full elsewhere, it should provide a lift to activity growth in Germany's trading partners."

David Brown of investment bank Bear Stearns said German business confidence is booming.

"Strong Ifo business sentiment numbers underline a very positive case for much more solid German recovery ahead," he said, adding that domestic demand, the Achilles' heel of the German economy, is now improving.

"It is not just robust export growth that is doing the donkey work, but stronger investment intentions are adding to the positive climate for recovery," he said. "German businesses are becoming much more upbeat about the recovery in domestic demand conditions as unemployment continues to trend lower."

The widely watched business climate index, based on a poll of some 7,000 companies, is considered a reliable barometer of the prospects of the German economy.