(Refiles to change headline to Update 3, not Update 2)
* Ifo at 3-yr high; biggest jump since German reunification
* Buzz from World Cup, warm summer weather cited
* Analysts upbeat on third quarter
* Survey offers relief to under-fire Merkel coalition
* Euro rises vs dollar after data
(Adds details, public reaction)
By Dave Graham
BERLIN, July 23 German business sentiment leapt by a record margin in July to reach its highest level in three years, fuelled by a World Cup buzz that boosted consumer spending in Europe's largest economy, a survey showed on Friday.
The unexpected jump, which boosted the euro, pointed to strong economic growth in the current quarter, though if the German recovery continued to be export-led, weaker countries in the single currency zone might suffer, analysts said.
The Munich-based Ifo economic think tank said its business climate index, based on a monthly survey of some 7,000 firms, rose this month to 106.2 from 101.8 in June.
This lifted the indicator to its highest level since July 2007 and was way above the mid-range forecast in a Reuters poll of 42 economists for a dip to 101.6.
"The German economy is in a party mood," Ifo said. "The increase is the largest since German reunification (in 1990)."
Graphic comparing German IFO and PMIs
The euro reversed early declines after the data was published, rising to the day's high of $1.2939 according to Reuters data, from around $1.2884 before the announcement and extending gains to $1.2947 by 1045 GMT.
September Bund futures were six ticks higher at 128.96.
The German data followed reports showing corporate sentiment in France and Italian consumer morale were unexpectedly robust in July, raising hopes for Europe's economic outlook, although that was tempered by an unexpected drop in French consumer spending on manufactured goods in June.
Recent indicators show the German economy has gained strength since a winter freeze that dampened a recovery from the country's sharpest post-war recession last year.
However, economists were astonished by the extent to which Germany has so far resisted the impact of a sovereign debt crisis in Europe and planned austerity cuts that followed it.
"These numbers are just insane," said Ralph Solveen, an economist at Commerzbank. "The economy is really growing strongly. We'll see a strong growth rate in the third quarter."
Germany enjoyed a strong run to take third place at the soccer World Cup, energizing millions of people across the country in June and July, and creating a feel-good mood that raised hopes of a pick-up in consumer spending.
On the streets of Berlin, there was cautious optimism.
"I'm not afraid of losing my job any more," said train mechanic Tobias Burgmann, 46. "I had to work shortened hours for a bit, but my employer said I can go back to full-time soon."
The jump in business optimism should also offer solace for Chancellor Angela Merkel, whose centre-right coalition has slumped to an all-time low in opinion polls despite the fact unemployment has been falling for a year.
Merkel's divided coalition lost control of the upper house of parliament this month and if her fortunes fail to recover soon, she risks fresh embarrassment next spring in a round of state elections that could weaken the government further.
Germany's manufacturing sector, a key driver of growth, has powered the country's pick-up, with engineering orders posting a record increase in May, boosted by vibrant demand from abroad and a more favourable euro exchange rate.
Still, a flash estimate of a poll of purchasing managers in manufacturing showed signs that foreign demand eased down a gear in July, and some economists said the positive impact of the Ifo data should not be overstated.
Analysts have long hoped Germany could steer its economy away from reliance on manufacturing exports towards broader-based demand, and July's Ifo data offered a ray of hope.
An Ifo gauge of morale among retailers broke into positive territory for the first time since the beginning of 1997.
Overall, the Ifo data showed a measure of current business conditions rose for a fifth straight month to 106.8 from 101.2 in June, while expectations rose to 105.5 from 102.5.
Some observers were sceptical, however.
Jennifer McKeown, an analyst at Capital Economics in London, said unless domestic demand showed signs of lasting improvement, the euro zone would not profit much from the upturn.
"Indeed, if Germany is simply taking a greater share of world exports than in the past, the peripheral economies might be losing out," McKeown said.
(Additional reporting by Christian Kraemer, Annika Breidthardt, Brian Rohan, Erik Kirschbaum, Sarah Marsh and Max Chrambach; Editing by John Stonestreet and Susan Fenton)