An abrupt slump in German business morale fuelled mounting fears that the eurozone is sinking into recession, piling renewed selling pressure on the newly vulnerable euro.

The struggling single currency succumbed to another bout of heavy losses on foreign exchanges today after the latest symptoms of rapidly weakening economic conditions were revealed across the 15-nation eurozone.

The closely-watched Ifo index of confidence among 7,000 leading German companies tumbled this month to its lowest ebb for three years as the business climate in Europe’s biggest economy continued to worsen.

The headline Ifo index for August sank to 94.8, from a July reading of 97.5, taking it to its weakest level since June 2005.

The finding came as separate official figures confirmed earlier estimates that the German economy shrank in the second quarter by 0.5 per cent, with GDP contracting for the first time since 2004.

“Right after the European Central Bank rate hike in July, Germany may be falling into recession,” Holger Schmieding, of Bank of America, said.

“With Spain turning down, Italy struggling and France losing a lot of momentum too, a serious German downturn would not bode well for the eurozone as a whole as well — to put it mildly.”

Currency markets reached the same conclusion after publication of the German figures and mounted a fresh assault on the euro, driving the dollar to its highest levels for six months against the single currency in European trading.

The euro fell by about 2 cents to hit levels as low at $1.4570 and is down more than 6 per cent this month, and on course for its biggest monthly decline since its inception in 1999.

Sterling also fell against the dollar as the resurgent greenback built on the recent gains it has made as financial market opinion has shifted to a gloomier prognosis over eurozone and British prospects. Traders have factored in the possibility of interest rate cuts in both economies.

The pound plumbed two-year lows against the dollar of $1.8336, while its overall value on its trade-weighted index matched recent 12-year lows in London dealing.

The dollar later ceded ground after continued anxieties over the American economic outlook were reinforced by more bad news from the slumping US housing market.

Average US house prices in 20 key metropolitan areas fell by a further 0.5 per cent in June, leaving them 15.9 per cent down from a year earlier, in a record annual pace of decline, according to the monthly S&P/Case-Shiller index.

But, despite housing woes, US consumer confidence bounced back more strongly than expected this month. The headline index in the latest snapshot of sentiment from the Conference Board research group rose to 56.9 for August, from a July reading of 51.9, climbing to its highest level since May.

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