German business sentiment rose to its strongest in seven months in February, offering fresh evidence that Europe's largest economy will dodge a recession even as euro zone peers tighten their belts to fight off the sovereign debt crisis.

The Munich-based Ifo think tank's business climate index, based on a monthly survey of some 7,000 companies, rose to 109.6 in February, beating expectations for 108.8. That was its highest since July 2011 and the fourth increase in a row.

The figures added to signs that Germany's economy would at least avoid a contraction in the first quarter just as new forecasts from Brussels predicted the euro zone as a whole would shrink this year. The euro rose to a 2-1/2 month high against the dollar in response to the Ifo numbers.

At the moment it doesn't look like a recession. The German economy looks robust, the domestic situation is particularly stable, Ifo economist Klaus Abberger told Reuters.

But Abberger also said risks remained, pointing to rising oil prices and a sovereign debt crisis that has engulfed Europe over the past two years.

LITTLE BY LITTLE

Germany's traditionally export-led economy contracted in the last quarter of 2011 as the debt crisis spread from Greece to key euro zone trading partners, but indicators signal a turnaround in 2012.

Economists now expect the economy to stagnate in the first quarter of 2012, dodging two quarters of negative growth which define a recession, before recovering from the second quarter onwards.

A Purchasing Managers' Index brought concerns over the outlook back to the fore, when the survey showed growth in Germany's manufacturing and services sectors slowed in February.

Yet Ifo's subindex on expectations showed investors remained confident. The reading rose to 102.3 from 100.9 in January.

Solid economic fundamentals, recent indicators and - despite all long-term worries - this week's Greek deal bode well for at least a stabilization of the German economy, said ING Bank economist Carsten Brzeski.

Today's Ifo is further evidence that the German economy only made a short stopover at the end of last year.

The responses to the Ifo survey were largely collected before a meeting of euro zone finance ministers on Monday, in which they sealed a second bailout package for Greece.

That is key to German companies who have not shrugged off the Greek crisis altogether. Deutsche Telekom posted a fourth-quarter net loss of 1.3 billion euros, dragged lower by impairments on its activities in the United States and Greece.

The confidence rebound in Germany continues amid a harsh winter and Greek drama, said Christian Schulz of Berenberg Bank. The assessment of the current situation improved for the first time since last June, a sign that improved confidence may already have positive effects on economic activity.

An Ifo sub-index on the current situation rose to 117.5 from 116.3 in January.

(Additional reporting by Alexandra Hudson, Madeline Chambers, Gareth Jones and Erik Kirschbaum; editing by Patrick Graham)