MANNHEIM, Germany (Reuters) - German analyst and investor morale sank in June at its fastest rate since October 1998 on worries about the health of the Spanish banking sector and uncertainty over the Greek election outcome, a survey showed on Tuesday.
The Mannheim-based ZEW economic think tank's monthly poll of economic sentiment fell to -16.9, weaker than any of the 42 forecasts in a Reuters poll and adding to signs that Germany, whose wealth is central to generating growth and financing bailouts in the euro zone, is beginning to feel the bloc's pain.
The figure plunged from 10.8 in May and came in way below the central forecast of a drop to 4.0.
"It has really come as a surprise to me that it is such a huge decline," ZEW economist Michael Schroeder said. "This is not just monthly fluctuation, this is really too big a change to be interpreted as that."
Schroeder added that falling exports and slowing growth in Europe and Asia had contributed to the decline.
The euro slid against the dollar and European stocks also dropped after the much weaker-than-expected survey.
"The financial market experts' expectations are a strong warning against a too-optimistic assessment of Germany's economic perspectives in the remainder of this year," said ZEW President Wolfgang Franz.
"The risks of a pronounced decline in economic activity in countries with close trade ties to Germany are very clear," Franz added, describing the situation in the euro zone as "precarious."
But ZEW's Schroeder said he did not expect Germany to fall into recession, although he said the country would experience slow growth and pointed to the negative outlook for the next half year, especially in the banking and insurance sectors.
"You can't exactly translate a negative figure in expectations into negative growth," he said.
The German economy grew a more-than-expected 0.5 percent in the first quarter but recent data from Germany has been disappointing, with data earlier this month showing that German imports tumbled at their fastest rate in two years in April and exports fell more than expected.
But some economists said there was still hope on the horizon.
"Towards the end of the year, we expect Germany's economy to grow again and help drag the rest of the euro zone out of recession," said Christian Schulz of Berenberg Bank.
The ZEW index was based on a survey of 274 analysts and investors conducted between May 29 and June 18. Around 30 of the results were collected after Greeks gave pro-bailout parties a narrow majority in Sunday's election but these were only slightly better than responses collected before Greece went to the polls, Schroeder said.
He added that the number of survey participants who expect the ECB to slash interest rates in the next half year had risen but they were still in the minority.
(Reporting by Christiaan Hetzner and Sakari Suoninen; Writing by Michelle Martin; Editing by Ruth Pitchford)