BERLIN (AFP) - German business confidence rose sharply in December, data showed on Monday, with a surprisingly strong boost suggesting a sunny outlook in Europe's biggest economy.

The upbeat assessment points to general satisfaction with the direction of the economy as German Chancellor Angela Merkel settles in to govern with a new "grand coalition" of her conservatives and the Social Democrats.

The Munich-based Ifo think tank's closely watched business climate index climbed to 110.6 points this month, higher than the 110 points pencilled in by analysts polled by Dow Jones Newswires. In December, it had stood at 109.5 points.

"Assessments of the current business situation rose to their highest level since June 2012," the head of Ifo Hans-Werner Sinn said.

"Expectations regarding future business developments reached their most optimistic level in almost three years. The German economy made a promising start to the New Year."

Ifo calculates its headline index on the basis of companies' assessments of their current business and the outlook for the next six months.

The sub-index measuring current business rose to 112.4 points in January from 111.6 points in December, while the outlook sub-index rose to 108.9 points from 107.4 points.

Ifo calculates its headline index on the basis of companies' assessments of their current business and the outlook for the next six months.

A separate key survey released week, the ZEW, stalled unexpectedly in January after rising to a seven-year high the previous month, but indicated that the recovery of Europe's top economy remained intact.

The ZEW, which is more volatile than the Ifo, questions analysts and institutional investors about their current assessment of the economic situation in Germany, as well as their expectations for the coming months.

The studies echo comments by the powerful BDI industry federation this month saying that Germany could notch up growth of 2.0 per cent or more this year if investment picks up and the eurozone stabilises.

Mr Johannes Gareis, eurozone economist at Natixis, said the stars looked aligned for a strong year in Germany.

"All in all, today's Ifo paints a rosy picture of the German economy," he said.

"After meagre growth of 0.5 per cent in the last year, the German locomotive will significantly gather steam in 2014." Mr Jonathan Loynes, chief European economist at Capital Economics, was equally bullish.

"January's Ifo survey suggests that the German economy has started the new year with a reasonable amount of momentum," he said.

He noted apparent softness in consumer activity, traditionally the Achilles' heel of the German economy, based on a fall in Ifo's retail sector index.

"Nevertheless the Ifo survey provides some support to our expectation that German GDP growth will accelerate from about 0.5 per cent last year to about 1.5 per cent in 2014," he said.

Mr Thilo Heidrich at Postbank noted the optimism across key sectors.

"The strong improvement in wholesaling and manufacturing from an already high level was particularly striking," he said.

"Furthermore fairly mild weather in January gave the construction industry a boost, leading to the third rise in a row."