The Ifo institute said its barometer of managers' sentiment in Germany declined to 102.1 points for April from 103.3 last month. Economists had expected a more modest dip to 102.8.
Ifo found that managers' view of both their current situation and the outlook for the next six months has darkened.
Germany, one of the world's biggest exporters, is concerned about the implications of trade disputes between the U.S., China and others. The European Union is seeking a continued exemption from new tariffs imposed by U.S. President Donald Trump on steel and aluminum imports.
On top of those concerns, data on German factory orders and trade for the first two months of this year have been disappointing.
However, Carsten Brzeski, an economist at ING-DiBa in Frankfurt, argued that talk of a slowdown is premature. He pointed to one-time effects such as harsh winter weather and high levels of sick leave due to a flu outbreak.
"Fundamentals are actually pointing to solid growth in the coming months, albeit less dynamic than last year," he said in a research note. "Inventories seem to have bottomed out and trade tensions, though mainly noise not facts up to now, have somewhat dented last year's optimism."
The Ifo index has been expanded starting this month to include the service sector as well as its longtime mainstays - manufacturing, trade and construction. It is now based on monthly responses from some 9,000 companies.
Tuesday's was the fifth consecutive monthly drop in the index, according to figures adjusted to reflect the inclusion of services.
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