By Kirsti Knolle and Eva Taylor
MANNHEIM Germany (Reuters) - German analyst and investor morale plunged in August to its lowest level in more than 1-1/2 years as the crisis in Ukraine took its toll, a survey showed, suggesting that Europe's largest economy is running out of steam.
Mannheim-based think tank ZEW's monthly survey of economic sentiment, published on Tuesday, fell for an eighth consecutive month to 8.6 in August, from 27.1 in July. That was its lowest since December 2012, as tensions in Ukraine hit stock markets and robbed firms of the confidence to invest at a time when worries about German economic growth are gaining ground.
The reading, which was way off the consensus forecast in a Reuters poll for a reading of 18.2, sent the euro to a session low against the dollar and pushed Bund futures higher.
"German investor confidence plunged in August, as concerns over growth and the escalation of tensions in eastern Ukraine triggered a sharp correction in equity markets in the past two weeks," said Christian Schulz, senior economist at Berenberg Bank.
"The drop in the ZEW index confirms the near-term downside risk for the German and euro zone economies emanating from the Ukraine crisis," he said.
ZEW said tensions abroad were probably behind the fall in economic sentiment, adding that weak industrial output and orders indicated German firms were investing significantly less as they are unsure of their ability to sell in the current climate.
German exports to Russia dropped by around 15 percent in the first five months of the year and a growing number of the 6,200 German firms active in Russia are warning that the standoff between Moscow and the West will hit their business.
On Tuesday German consumer goods group Henkel forecast a tough six months ahead as political turmoil in Russia, its fourth-largest market, is expected to hurt sales.
SLOWING ECONOMY
The ZEW survey also adds to signs of a slowdown in Europe's economic powerhouse. It comes on the heels of data that showed a drop in industrial orders and weaker business sentiment while output and exports have risen only modestly.
Data due out on Thursday is expected to show the economy stagnated in the second quarter, according to the consensus forecast in a Reuters poll, but a growing number of economists say it could even have contracted for the first time since late 2012.
Most economists have until now said they expect activity to pick up again in the third quarter but Carsten Brzeski, senior economist at ING, said the ZEW survey suggested economic weakness in Germany could extend beyond the April-June period.
"Today's ZEW sends a worrying signal that the growth performance in the second quarter could suddenly morph from a one-off into an undesired trend," he said.
The economy grew at its fastest pace in three years at the start of 2014 but that was mainly due to mild weather.
"Since the economy in the euro zone is not gaining momentum either, the signs are that economic growth in Germany will be weaker in 2014 than expected," ZEW said in a statement.
The government has predicted growth of 1.8 percent for this year, driven by domestic demand as shipments abroad are forecast to remain weak.
On Tuesday the German economy ministry said weaker momentum in the euro zone, the conflict in Ukraine and uncertainty about the situation in the Middle East weighed on the economy in the second quarter, although positive growth trends remained intact.
"The overall economic performance in Germany probably weakened in the second quarter," the ministry said in a statement. The ministry would not clarify whether this meant that the economy had contracted.
A gauge of current conditions in the ZEW survey tumbled to 44.3 from 61.8 in July, undershooting the consensus forecast for a reading of 55.5.
The index was based on a survey of 222 analysts and investors, and conducted between July 28 and Aug. 11, ZEW said.
(Additional reporting by Klaus Lauer in Berlin; Writing by Michelle Martin in Berlin; Editing by Alexandra Hudson, Madeline Chambers and Susan Fenton)