German business confidence fell more than forecast in July to touch the lowest level in more than two years, as the worsening sovereign debt crisis continued to take a heavy toll on the eurozone's largest economy.

The Ifo Institute on Wednesday said that its German business climate index fell more than expected to 103.3 in July from 105.2 the previous month. Economists had forecast a reading of 104.5.

July's reading is the lowest since March 2010.

The expectations index, which measures participants' outlook for the upcoming six months, fell to 95.6 from 97.2, while the current-conditions index fell to 111.6 from 113.9.

The Ifo index is based on around 7,000 monthly responses from companies in Germany's manufacturing, construction, wholesale and retail sectors.

It is the third month in a row that the index has fallen.

"The euro crisis is having an increasingly negative impact on the German economy," said Ifo Institute President Hans-Werner Sinn.

"The business climate in manufacturing deteriorated significantly. More specifically, manufacturers assessed their current business situation much less favourably than last month," he said.

Sinn said that manufacturers were also downbeat about the business outlook although other sectors of Europe's top economy provided some solace.

"Developments in retailing offer a ray of hope, as the business climate indicator continued to rise at this level of trade," Sinn said. "Retailers assessed both their current business situation and their six-month business outlook more favourably."