The Munich-based Ifo think tank said on Monday its business climate index, based on a monthly survey of some 7,000 firms, fell to 101.4 in September from 102.3 in August, defying expectations for a slight rise,.

A Reuters poll of 45 economists had forecast a slight increase to 102.5.

"September's fall in the German Ifo business survey is a reminder that even the euro-zone's strongest economies are suffering from a serious economic downturn," Jennifer McKeown, an economist at Capital Economics wrote in a note.

"While Germany might have avoided a recession in the third quarter, it seems like only a matter of time before the economy starts to contract. This will make support for the peripheral economies even more difficult to muster."

Business confidence in the Netherlands also fell in September to -6.7 points from -4.6 in August, data showed on Monday.

Dragging on the Ifo index was a sharp decline in sentiment among manufacturers, although companies in retailing and wholesaling reported a slightly brighter mood.

Tough austerity measures in many European states have weakened demand for German exports, and a weaker global economic environment threatens to crimp demand from emerging economies.

Industrial group Bosch ROBG.UL and steelmaker ThyssenKrupp (TKAG.DE), have announced plans to introduce "Kurzarbeit" or government-subsidized short-time work at German plants.

While the German economy steamed ahead in the first three months of the year, saving the euro zone from recession by growing 0.5 percent, it lost momentum in the second quarter, with growth slowing to 0.3 percent.

The Finance Ministry warned in its monthly report last Friday that data pointed to economic growth weakening in the remainder of the year. Many economists are now predicting a contraction for the third and possibly the fourth quarters.

Last week Markit's composite Purchasing Managers Index (PMI), showed Germany's private sector shrank for a fifth month, and a separate index for the euro zone showed that the ECB's aggressive new bond-buying plan has so far failed to inspire any major improvement in business at ailing euro zone companies.

The ECB's plan and a decision by Germany's Constitutional Court this month to allow the ratification of Europe's new rescue mechanism, had sent a wave of optimism through markets.

(Reporting by Berlin bureau; writing by Alexandra Hudson; editing by Noah Barkin)

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