German business morale fell in March, breaking four-months of gains, on worries the euro zone debt crisis could weigh on the performance of Europe's largest economy.

The Munich-based research institute, the Ifo, said today its business climate index, based on a monthly survey of some 7,000 firms, fell to 106.7 in March, down from 107.4 in February.

Ifo economist Klaus Wohlrabe said more than 85 per cent of responses had come before the latest developments in Cyprus, where international lenders and the country have so far failed to find a bailout compromise.

New View Economics chief economist David Brown said the Ifo survey suggested "the bells are starting to toll in Germany that the euro zone crisis is about to hit recovery prospects again".

"The biggest risk right now is that euro contagion is once again uncaged and ready to rip through the heart of economic confidence," he added.

The euro fell to a two-week low against the yen and struggled to hold gains against the dollar after the Ifo data and with Cyprus struggling to find a solution to its funding crisis.

Italian voters also cast an inconclusive vote last month, leaving the euro zone's third-largest economy in a political deadlock that could lead to a prolonged bout of instability.

Germany, Europe's economic powerhouse, expanded robustly during the first two years of the euro zone crisis but growth slowed last year and the economy shrank by 0.6 per cent in the fourth quarter.

Most economists still see the country escaping a recession, defined as two consecutive quarters of contraction. Wohlrabe said he expected growth in the first quarter and for the year as a whole.

The government expects economic growth of 0.4 per cent this year after 0.7 per cent in 2012.

A gauge on firms' expectations fell to 103.6 from 104.6 in February, while the assessment of their current situation also darkened to 109.9 from 110.2.

But ING senior economist Carsten Brzeski said the March fall was a correction after a very strong February reading.

"After last month's 'wow' effect, Germany's most prominent leading indicator, the Ifo index, shows some downward correction of too optimistic business expectations," Brzeski said.

"Despite today's drop, the absolute level of all components still points to growth in the first quarter."

Reuters