* German business morale drops to lowest since June 2010
* Ifo says ECB should cut key interest rate to 1.0 pct
By Sarah Marsh
BERLIN, Oct 21 German business sentiment fell for the fourth month in a row in October, dropping to its lowest level since mid-2010 and compounding fears Europe's powerhouse economy is headed for a sharp slowdown.
The Munich-based Ifo economic think tank said on Friday that its closely-watched business climate index, based on a monthly survey of some 7,000 companies, fell to 106.4 in October from a revised 107.4 in September.
This was the lowest level since June 2010, and slightly better than the 106.3 forecast in a Reuters poll of 52 economists.
Market sentiment has been rocked this month by uncertainty about a bailout for Greece and fears the euro zone's debt crisis could spiral back into a banking crisis.
"Confidence and activity received a blow from the escalating sovereign debt crisis, which has spread to the banking industry and the real economy," said Aline Schuiling, senior economist at ABN AMRO Bank.
"Nevertheless, we do not expect the German economy to enter a recession, as final domestic demand should be rather resilient and act as a buffer against declining exports."
Ifo economist Klaus Abberger told Reuters the European Central Bank should cut its key interest rate to 1.0 percent, adding he expected this to happen in two stages.
Germany's export-driven economy recovered swiftly from the 2008 financial crisis, outperforming its peers and providing a crucial growth engine for Europe.
But data increasingly suggest growth is easing due to a global slowdown and the euro zone's debt crisis. Industry output, orders and retail sales slumped in August.
Forward-looking indicators such as the Ifo business climate index point to a darkening outlook. Data this week also showed German investor morale dropping to its weakest level in nearly three years.
Chancellor Angela Merkel's government nearly halved its forecast for growth next year to one percent on Thursday, catching up with other recent downwards revisions by think tanks.
An Ifo sub-index on current conditions fell to 116.7 from 117.9 in September, while the expectations reading dropped to 97.0, down from a revised 97.9 in September.
German bluechips have warned recently about the deteriorating outlook. Chipmaker Infineon last week blamed uncertainty among its customers, linked to the euro zone debt crisis, for an expected decline in sales.