BERLIN German exports slid in September at the fastest pace since late last year, hit by declining demand among its crisis-wracked euro zone trading partners.
Imports also fell, adding to evidence that the crisis is inflicting a heavy toll on the currency bloc's largest economy.
The trade figures come after a string of disappointing data for Europe's economic powerhouse. Business sentiment has worsened, the private sector has contracted, joblessness has risen and industrial orders have fallen at their sharpest rate in a year.
"The debt crisis has arrived in Germany: At year-end 2012, weaker demand from abroad comes on top of uncertainty that has weighed on investments since the summer of 2011," said Andreas Scheuerle at Dekabank.
Imports fell 1.6 percent and exports declined 2.5 percent, data from the Federal Statistics Office showed on Thursday, undercutting forecasts in a Reuters poll of economists for declines of 0.1 percent and 1.5 percent respectively.
The seasonally-adjusted trade surplus narrowed to 17.0 billion euros from 18.1 billion in August. The consensus forecast was for it to narrow to 16.8 billion euros.
For a long time Germany's economy seemed impervious to the euro zone's troubles, but it is now succumbing.
Many economists now expect it to contract in the fourth quarter, a potential headache for Chancellor Angela Merkel before next year's federal election.
Exports had managed to hold up fairly well this year, and have fallen in only four out of nine months, as demand from Asia has compensated for a weaker appetite in European countries struggling with austerity measures.
But Thursday's data suggests this will no longer suffice.
Germany's export-oriented companies have bemoaned weakening demand from Europe during this earnings season, with tire maker Continental (CONG.DE) saying it would have to scale back output and steel maker Salzgitter (SZGG.DE) cutting its outlook.
Forecasts from the European Commission on Wednesday suggest next year will not be any rosier for demand for German exports. The euro zone economy will barely grow, it said.
Figures from France on Thursday showed the country's trade deficit narrowed in September, helped by lower energy imports and a jump in Airbus sales, although they masked falls in nearly all industrial exports.
A breakdown of the German trade data on an unadjusted basis showed exports to the euro zone slumped 9.1 percent on the year, even as exports to countries outside Europe rose 1.8 percent.
"Signs are increasing that gross domestic product could shrink tangibly in the fourth quarter after expanding slightly in the third," said Ulrike Rondorf at Commerzbank.
EURO CRISIS HITS DOMESTIC DEMAND
The drop in imports, which undercut even the lowest forecast in the Reuters poll, raises questions about the ability of domestic demand to prop up growth during the euro zone crisis, as many had hoped.
Christian Schulz of Berenberg Bank said the fundamentals for domestic demand remained strong, with unemployment still close to a 20-year low and wages rising for the first time in years. Consumer morale hit its highest level in over five years going into November, according to market research group GfK.
But Schulz said the euro crisis was nonetheless restraining private consumption and impacting companies' willingness to invest in the short-run.
"The fundamental outlook is good, the problem is really confidence which has been under pressure this year because of the crisis," said Schulz.
"We are not expecting a major boost from consumption next year, but continued moderate growth, and we expect a rebound in investment over the course of the year but it may take time until businesses believe the euro crisis will be resolved."
The HDE retail association said on Thursday it expected retail sales to have risen 1.5 percent in 2012 in nominal terms, but to have fallen 0.5 percent in real terms.
Sales would rise 1.5 percent to a record 80.4 billion euros in the key Christmas season, but HDE President Josef Sanktjohanser said, noting that this underscored the robust state of the branch despite worries about the economy.
Unemployment may be historically low, but data last month nonetheless showed it rose for a seventh month running.
Adidas (ADSGn.DE), the world's second-largest sportswear group, on Thursday trimmed its 2012 sales forecast, while Metro (MEOG.DE) last week reported a bigger-than-expected plunge in quarterly profit, warning that the outlook, even at home, was worsening.
Germany's government last month slashed its forecast for growth next year to 1.0 percent, and its panel of economic advisers this week even undercut that estimate, forecasting expansion of 0.8 percent.
(Additional Reporting by Rene Wagner, Annika Breidthardt and Madeline Chambers; Editing by Noah Barkin/Jeremy Gaunt)