The strength of Germany's economic recovery was thrown into question on Thursday with the most important national business climate index showing an unexpected a fall in April.

The drop in the Ifo index coincided with a report from the Organisation for Economic Co-operation and Development that forecast German growth this year of only 0.7 per cent.

The survey depressed sentiment in European equity markets, which also suffered from disappointing corporate news.

High unemployment, rising union militancy and a spate of corporate bankruptcies are combining with the weak economic outlook to pile pressure on the Social Democratic-led government as it gears up for September's elections.

IG Metall, Germany's biggest trade union, on Thursday balloted members over strike action.

The OECD says the German growth rate will rise in 2003 to 2.5 per cent but the Ifo says predictions of an upturn in the eurozone's largest country have yet to translate into concrete evidence of a recovery.

Defying expectations that it would continue the upward trend begun last October, the index for western Germany fell to 90.5 from 91.5 in March. The Munich-based Ifo institute says the decline was caused entirely by deteriorating sentiment among wholesalers and retailers.

Among equity markets to fall were the DAX in Frankfurt - down 2.2 per cent in late trading - and the CAC 40 in Paris, which closed 1.6 per cent lower.

In New York, the Dow Jones Industrial Average dropped below the 10,000 level in early trading, with investors expressing concern about the strength of the US recovery, in the wake of Wednesday's 0.6 per cent fall in durable goods orders.

Economic worries also weighed on the dollar, which dropped to a 3½-month low against the euro and there were signs of a surge into safe-haven assets, with gold reaching a 26-month high of more than $308 an ounce.

Economists cautioned against reading too much into one month's data, but said the Ifo survey showed weak consumer demand was holding back Germany's economy, which was the eurozone's worst performer last year with 0.6 per cent growth.

"The declines in the wholesale and retail sectors provide further evidence that, as yet, there are no foundations being laid for a more broadly based and sustained economic recovery," said Luigi Buttiglione of Barclays Capital. "That will require an improvement in the lacklustre outlook for consumer spending."

A similar analysis came earlier this week from the European Commission, which predicted in its latest assessment of the German economy that final domestic demand would shrink this year. "Private consumption remains bogged down by the high level of unemployment," it said.

Hans Eichel, Germany's finance minister, said on Thursday the economic recovery was still on track but added that the government did not plan to raise its forecast for economic growth this year of 0.75 per cent.

One ray of hope is that inflation is subdued, which could gradually lift consumer demand.

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