After quizzing 7,000 German companies in manufacturing, construction, wholesaling and retail, the Ifo institute said its closely-watched indicator rose to 83.7 points in April from an all-time low of 82.2 points in March.

“It is thus likely that the [rate of] decline in economic output will slow clearly,” said Ifo head Hans-Werner Sinn.

The gain was significantly better than analysts surveyed by Dow Jones Newswires had expected. They were anticipating a much smaller rise to 82.3 points.

Economists see the Ifo index as a key leading indicator to gauge the future health of the economy. It has been falling steadily – with occasional blips – since June 2008 as sentiment among firms plummets.

Analysts were cheered by the better-than-expected data, with some suggesting it could herald a turnaround in Germany’s economic fortunes later in the year.

“The signs are clearly mounting that the German economy will manage a turnaround in the second half of this year. Everyone who still believes in an unabated recession until 2010 is missing the boat,” said Andreas Rees from UniCredit.

Jörg Krämer from Commerzbank said the figures showed that “after a catastrophic first quarter, the German economy should slump less in the second and third quarters.”

Also cheering analysts was a rise in a sub index that measures the current business situation to 83.6 points from 82.7 points. A third sub-index, measuring expectations for the next six months, also climbed for the fourth straight month.

The world’s top exporter is presently in the grip of its worst recession since the 1930s amid falling demand for cars, machines and chemicals “made in Germany” as the financial crisis bites all around the world.

This week has seen a slew of dire forecasts for Germany, with the IMF predicting output to shrink by 5.6 percent in 2009 and a group of top economic institutes projecting a slump of six percent this year.

As the economy nosedives, jobless lines are set to grow, the institutes added, with more than one million jobs lost this year – a statistic sure to be on Chancellor Angela Merkel’s mind five months before a general election.

Berlin is poised to issue its own view of the economic prospects on April 29; and Finance Minister Peer Steinbrück has already acknowledged that output will contract by at least five percent.

He also revealed Wednesday that growth plummeted by 3.3 percent in the first three months of the year.

Nevertheless, it has not been all doom and gloom, with some tentative signs emerging that the nadir of the crisis has been reached.

Along with the surprisingly good Ifo indicator, another index measuring sentiment among financial market players posted its first positive reading in almost two years on Tuesday, leading some to predict the economy could begin to pick up in the second half of the year.

“Overall, April’s Ifo data indicate that the trough of Germany’s deepest recession since the second world war was during the first quarter,” said Timo Klein from Global Insight.

“This is not to say that positive growth is around the corner, but at least the pace of economic contraction should diminish significantly during the second and third quarters of the year,” he added.

Other economists were slightly more guarded in their optimism.

“All in all, we remain cautious regarding the overall economic outlook. Any recovery from the current levels will likely be slow and rather painful,” said Martin Lueck from investment bank UBS.