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BERLIN (Reuters) - German business sentiment dropped for a fifth straight month in September, raising fears of recession, as companies struggled with a bleaker economic outlook and the European Central Bank's bond buying plan failed to create much boardroom cheer.
Germany's relative resilience to the euro zone debt crisis has been steadily fraying as its firms see falling demand for their products from European partners and signs of a slowdown in other markets.
The European Central Bank's plan for potentially unlimited government bond-buying has raised hopes on financial markets of an end to the most acute phase of the crisis, but that optimism has not spread to the real economy.
The Munich-based Ifo institute's monthly sentiment index reached its lowest since early 2010 and the outlook component hit its worst level since May 2009.
"Today's Ifo index shows that German companies remain skeptical about the economic impact of (ECB president) Mario Draghi's magic," ING Bank economist Carsten Brzeski said.
"Despite fears of a looming Eurozone break-up clearly fading away, German businesses are downscaling their expectations. The German economy could see a contraction in the third quarter."
Ifo said 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 to 102.5 in a Reuters poll of 45 economists..
The expectations index dipped to 93.2 from a previous 94.2, and fell well short of a forecast 95.0.
In its monthly report, the Bundesbank said the domestic economy was robust, but added it saw signs of "weaker dynamics" and "great uncertainty".
Foreign trade could be hit more strongly than before by developments in the euro area, the central bank added, also pointed to the labor market, where the rise in employment is slowing as companies become less willing to hire.
Dutch business confidence also fell in September to -6.7 points from -4.6 in August, other data showed on Monday, adding to signs that the euro zone's stronger "core" economies are succumbing to the downturn.
While they have not been punished by debt markets like much of the euro's southern half, both Germany and the Netherlands have slashed public spending to secure the future of public finances.
"The drop in Ifo business confidence is a potent reminder that the outlook for the German and Eurozone economies still hangs in the balance," said Holger Schmieding, German economist at investment bank Berenberg.
"Further policy steps to contain the Euro crisis may be needed for the Eurozone to turn the corner."
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.
Dragging on the Ifo index in September was a sharp decline in sentiment among manufacturers, although companies in retailing and wholesaling reported a slightly brighter mood. Last week's ZEW survey also showed German analyst and investor morale picked up in September.
Industrial group Bosch and steelmaker ThyssenKrupp, have announced plans to introduce "Kurzarbeit" or government-subsidized short-time work at German plants.
The index would have fallen further had it not been for a ruling by Germany's constitutional court on Sept 12 in favor of the ratification of Europe's permanent bailout fund. Half of the responses in the survey came after the ruling.
The Finance Ministry warned in its monthly report last Friday that data pointed to weaker growth in the remainder of the year. Many economists are now predicting a contraction for the third and possibly the fourth quarters.
Another forward-looking indicator, the Purchasing Managers Index (PMI), last week showed Germany's private sector shrank for a fifth month, and a separate index for the euro zone showed that the ECB's bond-buying plan had so far failed to inspire any major improvement in business at ailing euro zone companies.
However, economist Gerd Hassel said he believed news of the ECB's bond-buying plan had yet to fully sink in.
"I'm optimistic that the Ifo climate index will rise again in the coming months," he said.
Reporting by Berlin bureau; writing by Alexandra Hudson; editing by Gareth Jones and Patrick Graham