It was the biggest drop in more than three years and below the consensus forecast in a Reuters poll of 30 economists for 9.0, undershooting even the most pessimistic estimate of 8.7. GfK said it was the first decline since January 2013.
"The escalation of the situation in Iraq, Israel and eastern Ukraine as well as the gradually accelerating spiral of sanctions in Russia have now also had a negative impact on the previously extremely optimistic economic outlook of Germans," GfK analyst Rolf Buerkl said.
Read MoreFears of slowdown as German business morale drops
Tough German sanctions on Russia following the downing of a Malaysian passenger flight in July have already impacted exports and Buerkl said this could become a real risk for the economy.
The GfK also reported a rise in shopper's propensity to save in August, which could hint at an increasingly cautious attitude towards spending in future.
"In contrast, income expectations and willingness to buy have so far remained relatively robust," Buerkl said, adding that these indicators were down slightly from the previous month but remained at a high level.
Germans are benefiting from a stable labour market, rising wages and moderate inflation which have made consumers more willing to spend their cash and more optimistic about their income expectations.
This is welcome news for the German government, which is increasingly relying on domestic demand rather than foreign trade as the main source of growth.
Read MoreEuro zone growth stagnates, Germany contracts
But in recent weeks the German economy has experienced some jolts and economic expectations have "completely collapsed in the light of the intensified state of international affairs", according to GfK.
Gross domestic product (GDP) unexpectedly contracted by 0.2 percent in the second quarter, the Federal Statistics Office revealed on Aug. 14.
Russian sanctions and the Ukraine crisis damaged confidence in the economy and led to the contraction, according to the finance ministry.
The conflict also contributed to a drop in German business sentiment for a fourth straight month in August, as think tank Ifo's Business Climate Index showed on Monday.
The list of potential threats to the economy also includes the disappointing recovery from the euro zone crisis, the intensification of the conflict in Iraq and low investor morale.
"If domestic framework conditions also deteriorate decisively as a result of any potential further escalation, it is probable that more difficult times will also lie ahead for the German economy," warned the GfK.
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