Jan. 24 (Bloomberg) -- German business confidence unexpectedly rose in January from a two-year low, indicating growth in Europe's largest economy will withstand the U.S. slowdown.

The Munich-based Ifo research institute said its business- climate index, based on a survey of 7,000 executives, increased to 103.4 from 103 in December. Economists forecast a drop to 102.3, according to the median of 42 estimates in a Bloomberg News survey.

The benchmark DAX stock index soared 6 percent as the Ifo report reassured investors Germany's economy will keep expanding, even as concern mounts that the U.S. is slipping into recession. Economy Minister Michael Glos said today there's ``no reason to panic'' and ``growth will continue,'' and Siemens AG, Europe's biggest engineering company, reported a first-quarter profit that beat analysts' estimates.

``People keep underestimating the strong fundamentals underpinning the German and euro-area economies,'' said Kenneth Broux, an economist at Lloyds TSB Group Plc in London, who correctly forecast the Ifo index would rise. ``Europe is strong enough to weather the weakness coming from the U.S.''

The Fed on Jan. 22 lowered its benchmark lending rate by three-quarters of a percentage point to 3.5 percent in the first emergency cut since 2001 to help revive the world's largest economy.

`Wishful Thinking'

The European Central Bank has so far signaled little willingness to follow suit, with policy makers expressing confidence in the economic outlook.

ECB council member Axel Weber said in an interview in Davos, Switzerland, today that interest rates are still supporting economic growth and investors' expectations of rate reductions later this year may be ``wishful thinking.''

The euro rose and bonds dropped as Weber's comments and the Ifo report damped speculation the ECB will follow the Fed's lead. The DAX index rose for the first time in eight days, ending its longest losing streak since October 1998.

Ifo said that while a measure of German executives' assessment of the current situation fell to 107.9 from 108.1 in December, a gauge of expectations for the next six months rose to 99 from 98.2.

`Well Positioned'

Today's report shows ``the German economy can partly decouple from the financial-market turbulence,'' said Folker Hellmeyer, chief analyst at Bremer Landesbank Kreditanstalt in Bremen. ``Germany is well positioned in the emerging markets. That's a sign of internal strength.''

German companies have increased exports to booming Asian markets. China's economy expanded more than 11 percent for the fourth straight quarter in the three months through December, the statistics bureau in Beijing said today.

Siemens said first-quarter sales rose 10 percent. Salzgitter AG, Germany's second-largest steelmaker, had a ``very good'' start to 2008, beating expectations, chief financial officer Heinz Joerg Fuhrmann said Jan. 17.

Still, the German government yesterday cut its growth forecast for this year to 1.7 percent from 2 percent, citing increased global risks, above all the possibility of a recession in the U.S. The DAX, which measures the performance of the country's 30 largest listed companies, has shed about 15 percent this year.

European banks say they will make it harder for companies and consumers to get loans in the next three months, according to a survey published by the ECB on Jan. 18. The U.S. housing slump made banks reluctant to lend, pushing up global credit costs.

``We haven't yet seen an impact of the financial crisis on the real economy,'' Herbert Luetkestratkoetter, chief executive officer at Hochtief AG, Germany's largest construction company, said in an interview yesterday. ``Nobody knows how the situation will evolve.''

To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net.

Last Updated: January 24, 2008 08:33 EST