However, the data from the Federal Statistics Office also showed German exports notched up a fresh record for all-2011 and economists said forward-looking surveys suggested the economy was already back on track after an apparent brief contraction.

"Germany suffered more than expected from the weak global demand towards the end of the year," said Commerzbank economist Ulrike Rondorf, adding that the strong decline was partly due to calendar effects.

"At the beginning of the year, the outlook for the German economy has improved, with the global economy picking up pace again and the uncertainty over the debt crisis easing."

The euro rose to multi-week highs versus the dollar and the yen on Wednesday as hopes that Greece would agree on austerity measures needed to secure a second bailout boosted sentiment.

Wednesday's data showed seasonally-adjusted exports fell 4.3 percent in December, the steepest decline since the height of the financial crisis in January 2009. The median forecast in a Reuters poll of economists was for a drop of just 1.0 percent.

A breakdown of year-on-year data showed exports to the euro zone dropping 3.3 percent, despite an overall 5.0 percent rise.

The drop in exports helped narrow the trade surplus to 13.9 billion euros from a revised 14.9 billion euros the month prior, missing a consensus forecast for a dip to 14.0 billion euros.

"The data from December means that the official fourth quarter estimate for an economic contraction of 0.25 percent needs to be revised downward," said Dekabank's Andreas Scheuerle.

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For a graphic on German trade balance and export growth, please click on: link.reuters.com/wut34s

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Germany's export-driven economy recovered quickly from the 2008/09 financial crisis but the euro zone's debt troubles and a global slowdown have cast a shadow over its growth outlook.

A first official estimate for gross domestic product in the fourth quarter points to a slight contraction but December data has been worse than expected.

Industrial output posted its biggest fall in December since the depth of the financial crisis at the start of 2009, the Economy Ministry said on Tuesday, underperforming forecasts by a wide margin.

Economists had hoped domestic demand would support the economy during this period of weakness and imports had been forecast to rise 0.6 percent, but they dropped by 3.9 percent.

Siemens AG (SIEGn.DE) said earlier this month it expected the economic environment to remain difficult as volatile financial markets hit the real economy and companies hold off on making major investments.

2011: RECORD YEAR

Nonetheless, forward-looking sentiment surveys suggest Germany's economic dip will be short-lived. Business sentiment rose for the third month in a row in January, while consumer morale rose going into February, hitting a 10-month high.

Full-year figures showed German exports exceeding the key trillion euro mark in 2011, at 1.060 trillion euros. Imports also reached a record 902.0 billion euros.

And the trend is upwards, with orders for industrial goods rising 1.7 percent in December, propelled by demand from outside the euro zone that is offsetting a drop in orders from within the currency bloc.

"With the 2008 financial crisis, the importance of different export markets for Germany shifted somewhat, with Europe declining slightly and the rest of the world increasing in significance," Anton Boerner, the head of the BGA trade association, told Reuters.

Boerner said he expected the sum of 2012 imports and exports to exceed 2 trillion euros for the first time.

The German trade balance rose to 158.1 billion euros in 2011 from 154.9 billion in 2010, contrasting strongly with Tuesday's data from France, the second biggest economy in the euro zone.

The French balance showed its trade deficit hitting a record high of just shy of 70 billion euros in 2011.

(Additional reporting by Brian Rohan and Rene Wagner, editing by Gareth Jones)

• A Permanent Economic Emergency