Seasonally-adjusted data from the Labor Office showed that unemployment dropped for a fifth consecutive month in March by a stronger-than-expected 18,000 to a total of 2.841 million. The consensus forecast in a Reuters poll of 35 economists was for joblessness to drop by 10,000.

"The resilience of the German Labor market bodes well for private consumption in the first half of the year," said ING economist Carsten Brzeski.

"The mild March weather and almost unshattered business optimism seem be the most important drivers behind today's drop in unemployment."

The German data is good news for Finance Minister Wolfgang Schaeuble whose budget plans are based on strong tax revenues. The report contrasted with figures from France this week showing the jobless total rising for a 10th consecutive month to reach its highest level since October 1999.

Germany's export-driven economy recovered quickly from the 2008/09 financial crisis but shrank by 0.2 percent at the end of last year as the euro zone's debt troubles and a global slowdown took a toll on exports and private consumption.

However the economy has seemed to pick up slightly this year, leading some institutes to hike their growth forecasts and many economists to predict stable or rising output in the first three months of 2012, thereby avoiding the two successive quarters of contraction that define a recession.

The Labor market has remained strong in the face of this phase of economic weakness, propping up consumer confidence, which has risen six out of seven months according to market research group GfK.

Falling unemployment has also emboldened trade unions to demand higher wages, after years of restrained pay growth which boosted Germany's competitiveness and helped cut joblessness.

Verdi and IG Metall unions are both asking for 6.5 percent wage rises for some five million workers in total.

Berenberg Bank's Christian Schulz said higher wages were "inevitable" given a tightening Labor market. Separate data earlier on Thursday showed the number of Germans in work rising by a seasonally adjusted 41,000 in February.

"While 6 percent wage demands are unlikely to be fulfilled, agreements with headline figures of 4 percent are likely," he said. "With inflation falling to 2.1 percent in March, significant real wage increases can give another welcome boost to consumer spending."

Nonetheless economists say the pace of decline in joblessness is easing as the impact of past Labor reforms designed to increase flexibility gradually subsides.

(Additional reporting by Madeline Chambers; Editing by Noah Barkin)

• A Permanent Economic Emergency