The German economy shrank by a larger than expected 0.6% in the final quarter in 2012, official figures showed today.
The drip is a clear sign that the European financial crisis is taking its toll on Europe's largest economy.
The quarterly decline was mainly due to a drop in exports as demand weakened from other European nations, many of which are in recession, the Federal Statistical Office said.
Germany relies heavily on exports to other European countries. As economic troubles grew in recent years in Spain, Italy and even France and Britain, demand for Germany's high-value industrial goods declined.
The fourth quarter drop was larger than the 0.4 to 0.5% decline being predicted by most economists, and was the German economy's worst performance since early 2009 when the world was reeling from a banking crisis.
Overall the economy grew by a paltry 0.7% in 2012.
However there are hopes that Germany has started 2013 in better shape.
Germany's central bank, the Bundesbank, said last month that there were signs of improvement and that growth in the first quarter would prevent the country from falling into recession - officially defined as two consecutive quarters of negative growth.
ING economist Carsten Brzeski said the figures were disappointing but that there was "no reason to start singing the blues on the German economy."
He noted improving confidence indicators, figures on factory orders and rising industrial production.
"With increased uncertainty stemming from the euro crisis and the global economic cooling in the second half of the year, the German economy has finally lost its invincibility," he said. "Looking ahead, however, there is increasing evidence that the economy should pick up speed again very quickly."
Even though German exports hit a record high last year, rising 3.4% overall, they shrank by 0.3% to the 27-member European Union. They were down an even greater 2.1% to its 16 partners in the euro zone.
After a strong start to the year, exports only crept up 0.3% in December after two large declines in the previous three months.
Germany is the world's second largest exporter, having lost its crown as the world's biggest in 2009 to China. The German government is predicting 0.4% growth overall for 2013, then an increase to 1.6% growth in 2014.