The Munich-based Ifo think tank said on Friday its business climate index, based on a monthly survey of some 7,000 companies, inched up to 109.9 in April from 109.8 in March, taking it to its highest level since July 2011.

Economists polled by Reuters had been expecting a slight fall to 109.5.

"The impact of the latest wave of the euro crisis on German business confidence remains small," said Christian Schulz of Berenberg Bank. "The fundamental strength of the economy continues to outweigh external worries."

The euro pushed up to a session high against the dollar and German bond futures erased gains on the numbers, which came days after another closely-watched German sentiment gauge from the Mannheim-based ZEW institute pushed to its highest level in nearly two years.

Europe's 2-1/2 year old debt crisis appeared to be easing in the first few months of 2012, but worries about the finances of big economies like Spain and Italy have unsettled markets in recent weeks.

The waning impact of the European Central Bank's massive liquidity injections has refocused investor attention on banking sector weakness and the difficulties in pushing through reforms in southern Europe, where some economies are mired in deep recessions.

Ifo economist Klaus Wohlrabe told Reuters that recent market turbulence related to Spain and Italy had not yet been reflected in the April report, raising the prospect of a weakening in the months ahead.

Still, he said demand for German goods from big countries outside the euro zone, like the United States and China, would drive export growth in the months ahead.

FOURTH QUARTER BLIP

The German economy has rebounded strongly from the global financial crisis in 2008/2009, interrupted only by a 0.2 percent contraction in the last quarter of 2011 when worries over the euro crisis weighed on exports and private consumption.

Many economists now believe this was a blip, and that Germany will avoid a recession, generally defined as two consecutive quarters of contraction.

Germany's leading economic institutes, whose forecasts form the basis for official government projections, revised up their forecast for 2012 growth on Thursday, projecting an expansion of 0.9 percent. For next year, they expect growth of 2.0 percent.

This contrasts starkly with the picture in debt-laden peripheral euro zone states like Greece and Spain which are mired in recession and have seen unemployment shoot higher.

An Ifo sub-index on current conditions edged up to 117.5 in April from 117.4, while a reading on expectations was flat at 102.7.

"This shows once again what good shape German companies find themselves in," said Andreas Scheuerle at DekaBank.

"The euro crisis is leaving a mark by denting growth. But given the dimension of the crisis for the euro zone, the damage to German firms is really minor."

Still some German companies have made clear they are not immune to the crisis.

German car maker Volkswagen (VOWG_p.DE) said on Thursday it was bracing for a "very demanding year" as the European debt crisis weighed on auto markets and global economic growth slowed.

Its truckmaking unit MAN SE (MANG.DE) announced on Friday that it planned to slash costs to rein in declining profit, which fell in the first quarter against a backdrop of rising competition in core western European markets.

MAN Chief Executive Georg Pachta-Reyhofen said his firm faced strong pressure on margins, especially in stagnating markets close to home.

(Writing by Noah Barkin and Sarah Marsh; Additional reporting by Stephen Brown, Alice Baghdjian, Erik Kirschbau, Elisa Odonne. Editing by Jeremy Gaunt.)

• A Permanent Economic Emergency