Germany leads drop in euro zone business sentiment

By Paul Carrel

BERLIN (Reuters) - German and French business morale fell sharply in April, depressed by a cocktail of high oil prices, a strong euro and market turmoil, and raising questions about whether the ECB will keep up its hawkish tone.

The stronger-than-expected deterioration in corporate sentiment in Germany and France, the euro zone's two biggest economies, reflected an abrupt downturn in sentiment across the broader common currency area.

In Germany, the Ifo economic institute said on Thursday its business climate index hit its lowest level since January 2006, dropping to 102.4 from 104.8 in March and falling below all forecasts in a Reuters poll of 52 economists ECONDE.

In France, which together with Germany accounts for roughly half the euro zone's economic output, business sentiment fell to its lowest level in nearly 1-1/2 years in April.

"The euro zone economy is coming under stress, particularly the more resilient part of the euro zone," said Bank of America economist Matthew Sharratt, adding that the European Central Bank could moderate its tough tone after the data.

ECB policymakers said on Tuesday the bank was prepared to raise interest rates if needed to bring inflation under control, the latest in a series of hawkish comments that helped to drive the euro <EUR=> to a record high above $1.60 on Tuesday.

The euro dropped to a one-week low versus the dollar after the Ifo data. Stocks also fell, while safe-haven bunds <EU10YT=RR> rose.

In further evidence of weakness across the region, Dutch business confidence fell in April to its lowest level since the end of 2005, while consumer confidence also slipped. In Belgium, business morale suffered its biggest ever monthly drop.