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Fears of German slowdown as business morale slumps

An employee scans barcodes on copper rods as they sit stacked outside at the Aurubis AG headquarters in Hamburg, Germany.
Krisztian Bosci | Bloomberg | Getty Images
An employee scans barcodes on copper rods as they sit stacked outside at the Aurubis AG headquarters in Hamburg, Germany.

Investors reacted to more bad news for Europe on Wednesday, as economic data showed that business confidence in Germany - the region's so-called powerhouse - had fallen more than expected.

The Ifo Business Climate index slipped to 104.7 in September, down from 106.3 in August and missing analyst expectations of 105.7 in a Reuters poll. This marked its lowest level since April 2013.

The index has two components which differed slightly, with the current conditions index beating forecasts but businesses' future expectations dropping lower and missing analysts' predictions.

"The German economy is no longer running smoothly," Hans-Werner Sinn, the president of the Ifo institute said in a release. He told Reuters that the faltering euro zone economy and the Ukraine crisis continued to weigh on sentiment, but he still expected growth of 1.5 percent this year for Germany despite an expected stagnation in the third quarter.

Read MoreEuro zone business activity hits 9-month low

Azad Zangana, European economist at Schroders, told CNBC the data were a "very clear sign" from German industrialists that business was slowing.

The euro weakened against the dollar after the release, although the German DAX stock index actually climbed, approaching session highs.

Traders highlighted that the slump could make it more likely that the European Central Bank (ECB) could step in with more policy measures to stimulate growth.

The numbers from the Munich-based research institution are widely watched by the investment community and give an insight into the business confidence in Europe's biggest economy, which has seen weakness recently amid tensions in Ukraine.

The weak number follows disappointing PMIs (Purchasing Managers' Index) for the euro zone, published on Tuesday, which accentuated selling in European stock markets.

Germany's numbers, however, showed some strength on Tuesday compared with neighbors like France, but the country hasn't been immune to the region-wide slowdown. In August, Germany's reading of gross domestic product (GDP) data showed that the economy had contracted for the first time in over a year in the second quarter. It showed a marked slowdown from the January to March period, when the economy grew strongly.

Read MoreWhat France and Germany can learn from each other

Some investors now expect the ECB to step in with an aggressive bond-buying program, despite concerns from Germany that such moves could dangerously stoke inflation. Soothing words from ECB President Mario Draghi on Wednesday helped European indexes at the open, with the central bank head saying he would keep policy loose for a "long time".

"I can tell you that the Governing Council is unanimous in committing itself to using the tools at its disposal to bring inflation back to just under two percent," he told France's Europe 1 Radio on Wednesday morning, according to Reuters.