The euro fell to session lows versus the dollar after the release of the data and Germany's DAX leading share index extended losses.
"December's decline in the German Ifo index provides further evidence that activity is slowing," said Jennifer McKeown, an economist at Capital Economics in London.
An Ifo gauge of current conditions fell in December to 108.1 from 110.3 the previous month. A reading of 110.0 had been forecast. The survey's expectations component dipped to 98.2, above the forecast 98.0, from 98.3 in November.
"With the fall coming almost entirely from current conditions rather than expectations, it seems pretty clear that concerns over the economic outlook are starting to feed through to business activity itself," McKeown added.
Ifo said companies remained optimistic about future exports but some firms have begun to complain that a rise in the euro is hurting their business.
French specialty chemicals group Rhodia said on Tuesday it would shed 129 jobs at a site in Freiburg, Germany, as part of a restructuring of its cellulose acetate business which it said was hit by the weak dollar.
The euro hit a record high of nearly $1.50 last month. A stronger euro makes German exporters' goods more expensive outside the 13-nation single European currency area.
In addition, German producer prices rose 0.8 percent in November from October and increased 2.5 percent from November last year, the Federal Statistics Office said Wednesday.
Germany's producer price index stood at 120.8 in November compared to 119.8 in October and 117.3 in November last year, the office said.