Authorities say the fall has been triggered by sharp drops in the cost of energy and fuel. Crude-oil prices have plummeted by more than half after peaking in July 2008, putting additional downward pressure on inflation as the global recession cut into German exports and forced many companies to put workers on reduced hours.

Germany is facing its worst economic downturn since World War II, with government forecasts suggesting that Europe's largest economy will contract 6 percent this year.

Although the recent fall in price levels has contributed to a rise in consumer confidence in Germany, analysts warn that a sustained period of deflation could stifle the nation's economic recovery and trigger a massive rise in unemployment. Economists are already warning that the euro zone should brace itself for a wave of lay-offs by the end of the year as the knock-on effects of the global recession impact the labor market.

While the European Central Bank (ECB) says the euro-area economy won't return to quarterly growth until next year, it has downplayed the threat of deflation in the region.

The ECB aims to keep inflation in the 16-nation euro region just below 2 percent. Last week ECB President Jean-Claude Trichet said the bank's inflation expectations "are in line with avoiding those risks and we will continue to be very alert in this respect."

Earlier this month the ECB announced it would keep its benchmark interest rate at a record low of 1 percent and lend banks as much cash as the want in an effort to promote credit flows.

sje/dpa/AP
Editor: Nancy Isenson