German investor confidence unexpectedly rose to a three-year high in March, suggesting Europe's largest economy will return to growth.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, increased to 48.5 from 48.2 in February, the highest since April 2010.

Economists forecast a decline to 48.1, according to the median of 40 estimates in a Bloomberg News survey.

The Bundesbank predicts the economy will expand in the current quarter after contracting 0.6 per cent in the final three months of last year.

Business confidence improved for a fourth month in February. Still, political turmoil in Italy and the prospect of a bank run in Cyprus are spooking financial markets and threatening to derail an economic recovery in the euro area, Germany's biggest export market.

ZEW said 13 per cent of the 245 responses to this month's survey were received yesterday, when news of the Cypriot levy on bank deposits sent the euro to its lowest level this year and caused stocks and commodities to tumble.

Moody's Investors Service said the Cypriot levy is negative for bank depositors across Europe.

European Central Bank council member Ewald Nowotny yesterday urged the Cypriot government to find a "fast and responsible solution" to secure a European Union-led bailout, rein in uncertainty and prevent a freeze in spending and investment.

Bloomberg