UPDATE 2-German business morale still up but outlook dims

* Consensus forecast for climate index had been for a drop

* Ifo economist says German recovery slowing down

* Data gives boost to euro, European shares; Bunds dip

* Outlook seen pressuring peripheral euro zone economies

(Adds analysts, company view, background)

By Stephen Brown and Paul Carrel

BERLIN, Sept 24 (Reuters) - German business sentiment rose unexpectedly in September to its highest since June 2007, though a growth slowdown in Europe's dominant economy risks piling more pressure on its struggling euro zone peers in coming months.

The Munich-based Ifo think tank's business climate index, based on a monthly survey of some 7,000 firms, rose for a fourth consecutive month to 106.8 from 106.7 in August, data showed on Friday [ID:nBAE003827].

The surprise uptick helped push the euro to session highs against the dollar and sterling, while European shares pared losses and Bund futures turned negative [ID:nWEA9505].

The mid-range forecast in a Reuters poll of 48 economists had been for a fall in sentiment to 106.2.

"Today's Ifo defies any double dip concerns for the German economy," said ING Financial Markets economist Carsten Brzeski.

Ifo economist Klaus Abberger said the survey also showed Germany's economic rebound was entering a new phase and losing some pace, with exporters somewhat sceptical over developments in the United States and China [ID:BAT005683].

That slowdown will likely fuel concerns in other parts of the euro zone, notably struggling peripheral economies such as Ireland which have been heavily reliant on 'growth engines' like Germany to help compensate for their own weak domestic demand, crushed by austerity measures.

Some recent indicators have strengthened the impression the German recovery is slowing after stellar 2.2 percent growth in April-June, the fastest quarterly growth in reunified Germany.

A purchasing managers survey released on Thursday showed growth in Germany's private sector slowed sharply in September. [ID:nSLANKE6DL] German investor morale also fell in September, dropping to its lowest since February 2009. [ID:nLDE68D0RG]

Brzeski expects Germany's economy to grow by 0.7 percent in the third quarter, slowing to 0.4 percent in the final quarter of 2010 then expand at around 0.4-0.5 percent through to 2012.

NOT ENOUGH GROWTH

"That's good for Germany but it's not exceptional," he said. "I think Germany would under this scenario ... regain the losses from the crisis by the end of 2011."

Such growth prospects were also "not strong enough to make the euro zone an outperformer" said Brzeski. "It will not be enough to offset sluggish growth in the periphery countries."

Brzeski forecast euro zone growth of around 0.4 percent in the third quarter and 0.3 percent in the final quarter of 2010.

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Graphic comparing IFO and GDP r.reuters.com/ceg35p

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An improved retail component gave hope German consumers might "pick up the reins as exports slow", said Jennifer McKeown at Capital Economics, but a return to fiscal tightening could temper that and Ifo's manufacturing and business outlook indices both fell.

"While Germany will continue to perform better than most euro-zone countries, a sharp slowdown is likely in the coming quarters," she said.

Despite signs of a slowdown, many businesses remain upbeat, especially about their prospects in fast-developing countries.

"We are benefiting from the fact that things are going well in ... emerging markets," said Ifo President Hans-Werner Sinn.

European truck sales rose 10 percent in August, though sales for the first eight months of 2010 were still down 35 percent on 2008 pre-crisis levels [ID:nLDE68N0CY]. Germany's MAN (MANG.DE) said it expects to beat a "conservative" 2010 profitability target thanks to record deliveries. [ID:nLDE68K0Q2]

Global chemicals market leader BASF (BASFn.DE) has raised its 2010 sales outlook, expecting the third quarter to beat market expectations, spurred by strong Chinese demand.

"Business in July and August suggests that BASF will again fare clearly better than expected in the third quarter of 2010," Chief Executive Juergen Hambrecht told Reuters on Wednesday.

Ifo's Abberger said he expects wages in Germany to increase in real terms in tandem with job security, bringing benefits to consumer activity. The European Central Bank's main interest rate is still at an appropriate level, he added.

(Reporting by Berlin Newsroom; writing by Stephen Brown and Paul Carrel; Editing by John Stonestreet)