German business confidence has slipped for the seventh consecutive month, according to the country's most closely watched business index. The IFO economic institute in Munich said its key western German index had fallen to 87.1 in December from 87.3 in November, the lowest level since January.

The fall, against a backdrop of growing industrial unrest, comes despite a half-point interest rate cut from the European Central Bank earlier this month.

"The decline was caused by a clear worsening of the current business situation, whereas the expectations for the next six months turned upwards for the first time since May," said Mr Hans-Werner Sinn, the IFO president, of the latest survey of the business sentiment of 7,000 managers.

The six-month index rose unexpectedly to 97.9 points in December from 95.8 points last month.

But survey responses from managers pointed to a poor short-term outlook, with a sharp fall from 79.0 points last month to 76.8 in the December survey.

The continuing fall in business sentiment reflects persisting pessimism in Germany, where the stagnating economy and rising unemployment are dragging down hopes for economic recovery elsewhere in the euro zone.

Meanwhile, wage talks between employers and one of Germany's most powerful unions were on a knife-edge yesterday, with neither side giving in to the other's demands. Services union Verdi is demanding a pay rise of "3 per cent plus" for its three million members while the government, representing employers, is proposing a pay freeze.

The talks took place as 10,000 members took part in warning strikes around the country, a day after similar strikes crippled Frankfurt Airport for hours.

Verdi union leaders said they were prepared to call all-out strikes if their demands were not met at talks that began yesterday.