Hopes that Europe's biggest economy could soon crawl out of recession have been dampened after the closely-watched ZEW index of investor confidence posted a slight but surprise drop in July.

The index, which measures the mood of financial market investors, ended an eight-month winning streak, falling to 39.5 points in July compared with 44.8 in June. Most analysts had expected a small gain.

The president of the ZEW institute, Wolfgang Franz, said the figures suggested Germany would not escape this year from its worst recession since 1945.

He said the data confirmed existing forecasts that the German economy would shrink by 6% this year. 'The growth rates are likely to move around 0% until the first months of 2010,' he added.

However, providing some cheer, a separate indicator measuring investors' assessment of the current economic climate in Germany rose marginally to minus 89.3 from minus 89.7 in June.

Optimists had been buoyed by recent positive data from the German economy, with other measures of business confidence rising and industrial production figures strong. In addition, German exports posted a slight rise of 0.3% in May from the previous month, leading some to predict that exports - on which the German economy is heavily reliant - have also turned the corner.