(Reuters) - German exports plunged in August by their largest amount since the height of the financial crisis and leading institutes slashed forecasts for growth, fuelling debate on whether Berlin is doing enough to prop up the domestic and European economies.

Exports slumped by 5.8 percent in August, data from the Federal Statistics Office showed on Thursday, the latest sign that Europe's largest economy is faltering amid broader euro zone weakness and crises abroad which have battered confidence and delayed German firms' investment plans.

"The economy seems to need a small miracle in September to avoid a recession in the third quarter," said Carsten Brzeski, an economist at ING.

The Federal Statistics Office said late-falling summer vacations in some German states had contributed to the fall in both exports and imports, but the figures still painted a gloomy picture for Germany following steep drops in industrial orders and output data earlier in the week.

Hours after the trade data was released, a group of leading economic institutes joined the International Monetary Fund (IMF) in slashing forecasts for German growth. They are now expecting growth of 1.3 percent this year and 1.2 percent next, down from 1.9 and 2.0 percent previously.

The institutes also urged the government to increase growth stimulus through capital spending and to encourage private investment, stressing there was sufficient "financial room for manoeuvre."

Chancellor Angela Merkel's government has faced pressure from within Germany as well as from ailing European states such as France and Italy to ratchet up public investment in infrastructure instead of prioritizing deficit reduction.

So far however, Merkel's government has made clear that its top priority is to deliver on its promise of a "schwarze Null" - a federal budget that is in the black, or fully balanced - in 2015.

The institutes indicated that the government could do more: "The most important job for economic policy in this field is to boost growth and create the right conditions for investment. There is some room for manoeuvre for constructive fiscal policy," they said, pointing to taxes and public spending.

The trade data showed seasonally adjusted imports falling 1.3 percent on the month, against expectations in a Reuters poll for a 1.0 percent rise. Germany's trade surplus stood at 17.5 billion euros, down from 22.2 billion euros in July.

Brzeski of ING described the figures as a "horror story" for the economy.

Germany had a strong start to the year but shrank by 0.2 percent in the second quarter. Evidence is mounting that it barely grew in the third quarter and some economists are forecasting another contraction in that period, which would amount to a technical recession.