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By Dave Graham
BERLIN, Feb 24 (Reuters) - German corporate sentiment unexpectedly worsened this month to its lowest level since reunification in 1990, raising pressure on the European Central Bank to make further interest rate cuts to support the economy.
The Ifo economic research institute said on Tuesday its business climate index, based on a monthly poll of around 7,000 firms, fell to 82.6 in February from 83.0 in January, dragged down by deepening gloom on the state of the global economy.
A Reuters poll had pointed to a reading of 83.0.
"Hopes that the battered economy might be about to turn around took another backlash today," Carsten Brzeski, an economist at ING Financial Markets, adding that the ECB would be forced to respond to the latest decline in sentiment.
"While other central banks have continued monetary easing since the beginning of the year, the ECB stood aloof, taking a period of reflection. Next week, the ECB will clearly get back into action and cut rates by at least 50 basis points," he said.
The survey showed that firms took a bleaker view of current business conditions than in January, but that their expectations for the next half year had risen for a second straight month.
Still, Ifo said in a statement that German firms remained "basically sceptical" about the outlook.
"On the whole the survey results don't signal a cyclical turning point," the institute said.
Corporate Germany, which profited from a boom in foreign demand in recent years that made it the world's biggest exporter of goods, is now suffering acutely from the global downturn.
MANUFACTURING WOES
The industrial sector has been especially hard hit, causing problems for the country's carmakers, and sentiment among manufacturers declined further in February, Ifo said.
Assembly lines at some Volkswagen plants in Germany fell silent on Monday as Europe's biggest carmaker switched to a short working week for the first time in 26 years.
Scaled-back production at six VW brand plants in western Germany and one plant in eastern Germany affected 61,000 workers as VW aimed to keep inventories of unsold cars from piling up.
Weak foreign demand battered the German economy late last year, with gross domestic product shrinking 2.1 percent in the final quarter, the biggest quarterly drop since reunification.
The government has already said it expects another marked decline in GDP in the first quarter.
Germany expects the economy to contract by around 2.25 percent this year, though some top economists have forecast a recession twice as severe. Since World War Two, the economy has never contracted by more than one percent in a year.
Last week a measure of German analyst and investor sentiment published by the ZEW institute showed a sharp rise in February, in a sign stimulus measures and interest rate cuts would help the economy on the road to recovery later this year.
Andreas Scheuerle, an economist at DekaBank, said the rise in the Ifo expectations gauge provided further evidence that German firms see better times ahead.
"Out of the valley of tears we're now seeing a small ray of hope with companies' improved outlook," he said.
"Because as soon as their expectations turn around that's a signal that they will be ready to start making investments and start hiring again in about six months' time."
(Additional reporting by Paul Carrel, Christian Kraemer, Noah Barkin, Brian Rohan, Kerstin Gehmlich and Erik Kirschbaum; Editing by Jason Neely)