The ZEW index, which measures the confidence of players in the financial markets, rose 18.1 points from April to 31.1 points in May – its highest reading since June 2006 and now above its historical average.

Tempering the optimism, however, was a separate indicator showing that investors’ assessment of the current economic climate in Germany had dipped slightly and stood at its lowest level since July 2003.

The head of the ZEW institute said the data suggested the German economy had reached its lowest point but warned that more jobs would be lost – a political headache for Chancellor Angela Merkel nearly four months before the national election.

“With regard merely to the economic activity, more and more signs indicate that the worst seems to be over. However, with regard to the labour market development the worst still seems yet to come,” ZEW president Wolfgang Franz said in a statement.

The headline confidence figure was much better than analysts had expected but some warned against getting carried away.

“This is only vaguely encouraging given the absolutely dire starting point,” said Jennifer McKeown from Capital Economics.

She pointed to the fact that the 294 financial market players surveyed for the ZEW index were still downbeat on the current state of the economy.

“Rising optimism has yet to translate into an actual improvement,” she said, adding that German economic output could yet end up even worse than the six percent contraction she and the German government think likely for 2009.

Although the economy contracted by 3.8 percent in the first three months of the year – the worst reading since records began – other signs of a tentative recovery in Germany have begun to emerge.

Both industrial orders and exports showed their first increases in March after falling for several consecutive months.

Another key survey of business confidence from the IFO institute also posted a modest rise in April, albeit from record lows, suggesting growth could begin to take hold again in the second half of the year.

After this year’s expected six percent contraction, the German government anticipates that the economy will scramble back into positive territory in 2010 with growth of 0.5 percent.

“We’ve probably just about reached the low point,” Merkel said on Sunday.

Further afield, the index also showed respondents were more positive on the outlook for the economies of Britain, the United States, the eurozone and Japan, buoyed by recent sharp stock market rallies and better-than-expected data.

Policymakers around the world have begun to express growing optimism that there is some light at the end of the tunnel as confidence gradually trickles back into the financial markets.

On Monday, US Treasury Secretary Timothy Geithner said the US economy had begun to stabilise, although he warned that a recovery would be “bumpy” and “fragile.”

European Central Bank president Jean-Claude Trichet signalled last week that the global economy is near a turning point.

“We are, as far as growth is concerned, around the inflection point in the (economic) cycle,” he told a meeting of central bankers.