FRANKFURT - GERMAN business confidence dropped for the sixth month running in November and to its lowest level since early 2003, a key index showed on Monday, after Europe's biggest economy plunged into recession.

The monthly business climate index calculated by Munich-based economic research institute Ifo 'declined strikingly in November' to 85.8 points from 90.2 in October, a statement quoted Ifo president Hans-Werner Sinn as saying.

The last time the index was that low was in February 2003, when it fell to 84.9 points during Germany's last recession.

Analysts polled by Dow Jones Newswires had expected the widely-watched business sentiment indicator to drop to 88.6 points.

'On the whole, the economic downturn has worsened and will now have an impact on the labour market,' Mr Sinn said.

'Export business is expected to weaken at an accelerated pace and plans call for reductions in staff,' he added.

Germany is the world's leading exporter and its economy is heavily dependent on trade.

At Capital Economics, economist Jennifer McKeown said that 'the recent relationship between the index and annual GDP (gross domestic product) growth now suggests that GDP could now be falling by up to one percent compared to a year earlier.' Germany officially entered recession, as defined by two successive quarters of economic contraction, in the third quarter of this year.

A sub-index of the Ifo survey that measures the current situation in Germany was also sharply lower at 94.8 points, compared with 99.9 in October, while expectations for the next six months dropped from 81.4 points to 77.6 points, the institute said - the lowest six-month outlook since 1991 when the survey began.

Retailers in particular 'are anticipating a much more negative business development in the coming six months,' Ifo said.

Ms McKeown commented that 'the only hope is that the index is now overstating the downturn in activity in the same way that it overstated the latest upturn.

'Worryingly, business expectations have continued to fall, suggesting that companies have yet to see any light at the end of the tunnel.' On Friday, a eurozone purchasing managers' index (PMI) for November compiled by data and research group Markit marked its biggest drop on record and fell to its lowest level in that survey's 10-year history.

German Chancellor Angela Merkel warned on Sunday in the Welt am Sonntag newspaper that 'we must expect that next year will be a year of bad news, at least in the first months.' Several German industries have been slammed by the recession, with the auto, chemical and steel sectors announcing sharp production and staff cutbacks, and many companies have said they can not provide earnings outlooks for 2009.

Ms McKeown said that the German economy could contract by 'at least 0.5 per cent next year,' and added that the gloomy news might herald 'aggressive ECB interest rate cuts' from the current level of 3.25 per cent.

At Bank of America, senior economist Holger Schmieding forecast that 'the ECB may cut interest rates by 75 basis points instead of the expected 50 basis points at its December 4 meeting.' -- AFP