German business sentiment surged to its highest level in 16 months in August, driven by a pickup in the manufacturing sector, and suggesting Europe's largest economy is gaining momentum following strong growth in the second quarter.

The Ifo think tank said on Tuesday its business climate index, based on a monthly survey of some 7,000 firms, rose to a better-than-forecast 107.5 in August, its fourth consecutive rise and the highest level since April 2012.

That was up from 106.2 in July and came in just below the highest estimate in the Reuters poll of 33 economists of 107.8.

"The German economy moved up a gear," said Ifo economist Kai Carstensen. "Companies are more satisfied with their current business situation. Their optimism regarding future business developments - although slightly cautious - also grew."

A bastion of strength in the early stages of the euro zone crisis, the German economy slowed to a halt at the end of last year and narrowly avoided recession early in 2013.

But it grew at its strongest rate in more than a year in the second quarter, helping the euro zone as a whole out of its 1-1/2 year recession.

Ifo economist Klaus Wohlrabe told Reuters the euro zone recovery was having a positive effect. Manufacturers expected their exports business to improve and said their current business conditions were "considerably better than last month".

Other data have pointed to a pick-up in German economic activity, however with export expectations still subdued.

"We doubt that the recovery will be as rapid (as Ifo suggests)," said Jennifer McKeown at Capital Economics. "Other surveys like the PMI point to far more modest growth and exports will continue to be held back by weak demand from key markets elsewhere in the euro-zone."

Many economists now believe that the German economy will expand at a faster rate than the government's current forecast of 0.5 percent growth this year, but expect a slight slowdown from the pace in the second quarter.