German investor morale hit hard by Ukraine woes

The German ZEW indicator of economic sentiment saw a steep drop in August, missing analysts' expectations and sending the euro lower, amid increasing concern over the health of the euro zone's biggest economy.

The ZEW institute's index, a gauge of investor morale in the country, hit 8.6 points, sharply below the 18.2 forecast in a Reuters poll, and a big drop from July's reading of 27.1. This is the lowest reading since December 2012.

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ZEW's current conditions index came in at 44.3 points, a drop from 61.8 in July. Analysts had expected a figure of 55.5.

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The think tank said sluggish demand in the euro zone as well as geopolitical tensions in Russia could see German growth come in weaker than expected this year.

"The decline in economic sentiment is likely connected to the ongoing geopolitical tensions that have affected the German economy by now," ZEW said in a statement.

"In particular, current figures on industrial production and incoming orders suggest markedly reduced investment activities on the part of German firms against the backdrop of uncertain sales prospects. Since the economy in the euro zone is not gaining momentum either, the signs are that economic growth in Germany will be weaker in 2014 than expected."

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The euro traded down against the dollar following the news.

Weak data

The numbers come after a raft of weak data and will cause further alarm bells over the German economy. German factory orders fell 3.2 percent month-on-month in June—the largest decline since September 2011 while industrial output rose just 0.3 percent, below the 1.3 percent forecast by economists.

Eastern Europe slowing due to tensions: Henkel CEO

Germany could also see second quarter gross domestic product shrink towards zero from 0.8 percent in the first quarter due to the sanctions imposed on Russia, the influential Ifo Institute think tank warned earlier this month.

"The growth forecast that Ifo presented last month will likely have to be revised downward. The assumption that the second quarter will have grown 0.3 percent from the first quarter can no longer be held onto. It's more likely that there was zero growth in the second quarter," Ifo president Hans-Werner Sinn wrote in a column for Wirtschaftswoche magazine.

Russia impact

Around 10 percent of exporting businesses in Germany sell to Russia, according to the Statistics Office, and many German companies have felt the impact of tensions in the East.

German sports brand Adidas issued a profit warning last month and slashed its net income forecast, citing "tensions" in Russia.

Henkel, maker of Persil detergent and Schwarzkopf hair products, warned earlier on Tuesday that geopolitical tensions in Russia could cause slower earnings growth in the second half of this year.

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"What we are seeing a slowdown is in Eastern Europe, less so surprisingly enough in Russia. Russia continues to grow…But overall the economy is slowing down due to political crisis in Eastern Europe, and particularly in Ukraine," Kasper Rorsted, CEO of Henkel, told CNBC in a TV interview.

"We do think that we will see a slower growth in the second half in Russian than we did in the first."

Henkel was down more than 5 percent on the DAX index by mid-morning.

- By CNBC's Arjun Kharpal