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BERLIN (Reuters) - Morale at German businesses climbed in December as their confidence in the outlook rose at its fastest rate in 2-1/2 years, boosting hopes Europe's largest economy will bounce back quickly after a weak end to 2012.
The Munich-based Ifo think tank said on Wednesday its business climate index, based on a monthly survey of some 7,000 firms, rose to 102.4 in December.
That was up from 101.4 in November and the highest level in five months, though the sub-reading for current business conditions fell.
"With a worsening current assessment but improving expectations, today's Ifo sends a clear message: things will go worse before they get better. It looks as if any contraction of the economy should be short-lived," said Carsten Brzeski of ING.
Germany has been an engine of growth throughout much of the three-year debt crisis in the euro zone, but persistent weakness in other countries in the region has recently threatened to drag its economy down.
German GDP could well contract in the fourth quarter, many economists believe - a view supported by October's slump in industrial output and narrowing of the trade surplus to its lowest level in over half a year.
For 2013, the Ifo and the country's central bank this month cut their growth forecasts for 2013 and the government may do likewise.
But Wednesday's Ifo reading, which followed a December Purchasing Managers' survey that showed the private sector expand for the first time since April, beat the median forecast in a Reuters poll of 40 economists for a rise to 102.0.
The data boosted European stocks to their highest levels of the year. The euro also climbed against the dollar.
"The result ... supports our expectations that the German economic climate should take a turn for the better by spring 2013 at the latest ... The economy should avoid a recession by a whisker," said Heinrich Bayer of Postbank Research.
Markets have also been encouraged by a European Central Bank promise to buy the bonds of stricken euro states, an agreement last week to release new aid to Greece and an upgrade of the country's sovereign debt rating.
"There is a certain calming down at the end of the year. Export expectations have risen. Companies are growing confident again," Ifo economist Klaus Wohlrabe told Reuters.
The firms polled by Ifo were more pessimistic about their current business conditions, with that index falling to 107.1 from 108.1 in November, the lowest level in 2-1/2 years.
But the sub-reading on expectations increased to 97.9 from 95.2, the biggest month-on-month rise since June 2010.
Wohlrabe said growth impulses would come from Asia and the United States, making up for a lack demand from recession-hit peers in the rest of the European Union, where Germany sells roughly 60 percent of its exports and governments are slashing costs to rein in public deficits.
German luxury carmaker Daimler (DAIGn.DE) is revamping its China operations, trying to catch up with rivals in a market that has helped premium German manufacturers offset weakening business in core European markets.
Last week, Ifo nearly halved its forecast for 2013 German growth to 0.7 percent but said domestic demand would help it pick up next year after a brief contraction this quarter.
Ifo said the euro zone's debt crisis had hit the German economy later than expected, delaying the recovery.
Wohlrabe said he expected a 0.3 percent contraction this quarter and "slightly positive" growth in the first three months of 2013.
In line with that, a German trade group forecast on Tuesday that steel production would return to modest growth next year, with companies rebuilding stocks as demand from the automotive and engineering sectors picks up.
Reporting by Madeline Chambers, Noah Barkin, Christian Kraemer and Annika Breidthardt; Editing by John Stonestreet