Escalating tensions in the Middle East over the Mohammed caricatures, the west's nuclear stand-off with Iran and the election success of Hamas militants in the recent Palestinian elections are having an adverse effect on European trade in the region.

Since the row over cartoons of the Prophet Mohammed surfaced over a week ago, a boycott of goods from a number of European nations has been gaining ground across the Muslim world.

In the first flush of anger, Danish products were the first to be banned as a response to the images of which first appeared in the Danish daily Jyllands-Posten last year. In the days that followed, the images were reprinted in a dozen publications across Europe sparking further boycotts of goods from Norway, France, Italy and Britain.

As the conflict continues, Germany now finds itself in the firing line as one of those countries involved in both the Mohammed dispute and the Iranian nuclear stand-off.

One of the most important western trading partners in the Middle East, specifically in Iran, Germany has a lot to lose economically if relations between Islamic nations and the west deteriorate further. German businesses are already nervous and some predict that even if the areas of conflict are resolved, trade relations may be severely damaged.

The importance of western trade with Iran has not been lost on the Iranian President Mahmoud Ahmadinejad. As the threat of economic sanctions hangs over the Islamic Republic due to its decision to restart its controversial atomic research program, Ahmadinejad is considering a counter-strike against those involved in pushing for those sanctions.

Iranian president harnessing Mohammed anger

Channeling the anger stirred by the Mohammed cartoons, the Iranian president aims to garner support from his Islamic neighbors by instigating his own trade embargos with the west.

Denmark, as the main culprit in the cartoon row, is the first to suffer. Iran stopped the import of Danish goods on Tuesday. The harsh words coming out of Tehran aimed at the German administration may precede similar action towards Germany. For a country which has worked long and hard to develop such strong commercial relations with Iran and the Middle East as a whole, such a development is worrying.

"Iran is Germany's most important trading partner in the region," said Jens Nagel, an expert at the German Federation of Wholesale and Foreign Trade, in an interview with the business weekly Manager Magazin. Only the United Arab Emirates carries more weight in business in Iran than Germany.

Germany's reputation in the region has been built on the quality of products and the good business relationships it has built up over years, something that is highly prized in Arab countries.

German industry to take a hit if Iran counters

German businesses exported goods and services to Iran last year to the tune of about 4.5 billion euros ($5.38 billion), and did business worth about 450 million euros with both Syria and Lebanon. The main areas of trade have traditionally been chemical and industrial products and machinery. It is the metal industry in particular that could be most at risk if Iran were to retaliate to United Nations sanction by hitting back at its western trade partners.

"Germany would be the western industrial nation to suffer most if economic sanctions went against Iran," Nagel said. "German businesses deliver far more to the region than possibly Great Britain, France or Italy."

He added that the United States would not feel any effects as they had broken off economic relations years ago.

Experts consider the economic fallout from the Mohammed caricature row to be a lot lower risk for Germany. Knee-jerk boycotts and short embargoes would not necessarily affect German trade to any significant degree in the Middle East. If and when the climate cools, analysts believe it will be "business as usual" for German companies doing business in the region. Many believe the current boycotts are unlikely to remain intact indefinitely.

Partnerships in Middle East should hold firm

"We have no indication that business connections have gotten worse between German enterprises and their partners in the Middle East," said Jochen Clausnitzer, Middle East expert at the German Chamber of Commerce and Industry (DIHK).

Many German enterprises have maintained their long-standing partnerships in the region through personal interaction and trust. This is a base which cannot be destroyed so quickly -- even if the outrage continues to surge through the region.

"In the short term, sales of some European consumer goods producers could suffer," Clausnitzer said. "However, on the other hand, western consumer goods in the region enjoy a high prestige."

Iran may seek to inhibit business

The main concern for German businesses then remains Iran. Since the election of President Ahmadinejad, many top positions in the economy and management have been taken by new people and there is little connection between German businesses and those who initially paved the way for the business links the two countries have enjoyed until recently. Those in the new positions are also likely to receive orders from the president not to do business with Germany if relations deteriorate further.

Any German involvement in sanctions against Iran would also see sales of products already in the Islamic Republic drop off dramatically.

"Sanctions weld together the state and the population," said Clausnitzer, suggesting Iranians would show support for their government by choosing not to buy German goods.

However, Germany -- and Europe as a whole -- has a bargaining chip. If Ahmadinejad wants to carry out his promised infrastructure reform plans in Iran he will have to depend on the EU as a trading partner. In 2004, almost 50 percent of all imports into Iran came from Europe. The president's election promises to fight poverty and youth unemployment would be a lot harder to fulfill if he were to be denied that.