UPDATE 1-German Ifo business morale in June hit by Ukraine, Iraq

Tue Jun 24, 2014 4:50am EDT

* Ifo falls more than expected

* Firms remain confident about current business

* German fundamentals intact, but Ukraine, Iraq could hurt (Adds details, background)

By Annika Breidthardt

BERLIN, June 24 (Reuters) - German business sentiment weakened more than expected in June as concern grew among companies in Europe's largest economy that tensions in Ukraine and Iraq would hurt their business.

The Munich-based Ifo think tank's business climate index dropped to 109.7 from an unrevised 110.4 in May, marking its second consecutive monthly fall.

Expectations in a Reuters poll of 40 economists had been for the index, which is based on a monthly survey of some 7,000 firms, to fall to 110.2.

"The German economy fears the potential impact of the crises in Ukraine and Iraq," Ifo president Hans-Werner Sinn said in a statement.

German firms have been concerned since early this year about tensions in Ukraine, fearing that tougher sanctions could hurt their business. Iraq's fight against a Sunni insurgency has pushed up oil prices on fears of potential supply disruptions.

More than 6,000 German companies are active in Russia and business and trade bodies have warned that an escalation in tensions over Ukraine would result in catastrophic losses for firms.

On Monday, the European Union urged Russia to back President Petro Poroshenko's peace plan for Ukraine, but its threat of tougher sanctions if Moscow failed to do so appeared to have only partial support.

TAKING A TOLL

"Global uncertainties are taking their toll," said economist Holger Schmieding of Berenberg bank. "Germany's domestic fundamentals remain solid," he added, pointing to strong employment, low inflation and buoyant construction.

"(But) we need to watch the situation in Ukraine, Russia and Iraq carefully."

Following 0.8 percent growth in the first three months of the year, the government expects economic growth to slow. It forecasts growth of 1.8 percent for the year as a whole on the back of strong domestic demand and a healthy jobs market.

Ifo said firms expected their outlook to worsen, with a sub-index dropping to the lowest level since October 2013. They remained confident about current business, with a sub-index on conditions holding steady.

The data is likely to keep pressure on the European Central Bank (ECB) to ease policy even further in coming months, especially after data on Monday showed that German manufacturing output increased at its weakest rate since September. Service sector growth also slowed.

But Ifo economist Klaus Wohlrabe said the ECB's move to cut interest rates to record lows and offer new long-term loans to banks to help boost lending to euro zone companies had had little effect on the German economy.

"The financing climate was and is good," said Wohlrabe. (Reporting by Berlin Newsroom; Editing by Stephen Brown)

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