The latest survey of companies by the Ifo economic think tank shows business sentiment dropped for the fourth month in a row in August.
It is now at its lowest level since March 2010, driven down by increasing worries about the future level of exports.
Leading industrial manufacturers ThyssenKrupp, Opel and Bosch are reducing working hours – or planning to – due to weaker demand.
Business expectations for future growth fell to a more than three-year low.
Growth in Europe’s largest economy slowed in the second quarter of this year to just 0.3 percent.
A string of increasingly gloomy data has raised the possibility of recession in the second half of the year.
That is particularly bad news for the eurozone economy. Germany has been, until recently, resilient to the crisis and is seen as crucial to hauling the region out of its slump.