Economic research institute ZEW's closely watched financial sector index fell to 21.2 points from 28.7 points in June.
In May, the measure fell to 45.8 points and it then tumbled again sharply in June amid fears that a German austerity package aimed at curbing the public deficit and debt would undercut economic growth.
The July reading was the lowest since April 2009. At the same time, however, the ZEW institute noted that other German data were positive.
'This is in stark contrast to the economic situation. Positive data on industrial activity show the favourable development of the German economy during the second quarter 2010,' a ZEW statement noted.
A sub-index that measures assessments of the current economic situation improved sharply to a better than expected 14.6 points, gaining 22.5 points to reach positive territory for the first time since July 2008.
