BERLIN (Reuters) - German business morale fell in March, breaking a four-month run of gains, as an inconclusive vote in Italy and a stand-off over a bailout for Cyprus reignited worries the euro zone debt crisis could weigh on the performance of Europe's largest economy.
The Munich-based Ifo think tank said on Friday its business climate index, based on a monthly survey of some 7,000 firms, fell to 106.7 in March, down from 107.4 in February.
Ifo economist Klaus Wohlrabe said more than 85 percent of responses had come before the latest developments in Cyprus, where international lenders and the country have so far failed to find a bailout compromise that both sides can agree to.
But David Brown of New View Economics said the Ifo survey suggested "the bells are starting to toll in Germany that the euro zone crisis is about to hit recovery prospects again".
"The biggest risk right now is that euro contagion is once again uncaged and ready to rip through the heart of economic confidence," he added.
The euro fell to a two-week low against the yen and struggled to hold gains against the dollar after the Ifo data and with Cyprus racing against time to find a solution to its funding crisis.
Before Cyprus brought the crisis back to the fore, Italian voters cast an inconclusive vote last month, leaving the euro zone's third-largest economy in a political deadlock that could lead to a prolonged bout of instability.
Germany, Europe's economic powerhouse, expanded robustly during the first two years of the euro zone crisis but growth slowed last year and the economy shrank by 0.6 percent in the fourth quarter.
Most economists still see the country escaping a recession, defined as two consecutive quarter of contraction, with weak growth in the first quarter before regaining momentum.
Wohlrabe also said he expected growth in the first quarter and for the year as a whole. The government expects economic growth of 0.4 percent this year after 0.7 percent in 2012.
A gauge on firms' expectations fell to 103.6 from 104.6 in February, while the assessment of their current situation also darkened to 109.9 from 110.2.
But Carsten Brzeski of ING said the March fall was a correction after a very strong February reading.
"After last month's 'wow' effect, Germany's most prominent leading indicator, the Ifo index, shows some downward correction of too optimistic business expectations," Brzeski said.
"Despite today's drop, the absolute level of all components still points to growth in the first quarter."
The headline number was below the median forecast in a Reuters poll of 37 economists for the business climate index to climb to 107.6.
(Reporting by Berlin bureau; Writing by Annika Breidthardt; Editing by Noah Barkin and Stephen Brown)