German business confidence has increased more than expected this month, a closely watched survey showed.

Hopes are rising that Europe's largest economy will quickly put behind it a weak patch and benefit from an easing in the continent's financial turmoil.

The Ifo institute's confidence index, a key indicator of where the German economy is headed, rose to 104.2 points in January from 102.4 in December.

The third consecutive increase lifted the index to its highest level since last June and was better than economists had predicted.

Managers' view of their current situation improved somewhat and the outlook for the next half-year improved significantly. In particular, Ifo said in a statement, "optimism is returning" in the important manufacturing sector.

"The German economy made a promising start to the new year," it said. The German economy grew a modest 0.7% last year, and officials estimate it shrank by around 0.5% in the fourth quarter compared with the previous three month period.

But the country's central bank, the Bundesbank, said earlier this week that it is already showing signs of picking up. Ifo's survey is based on responses from about 7,000 companies in various business sectors.