The Munich-based Ifo think tank said its business climate index, based on a monthly survey of some 7,000 companies, fell to 106.4 in October from a revised 107.5 in September.
The median forecast in a Reuters poll of 52 economists was for a drop to 106.3.
Abberger said ongoing concerns about the euro debt crisis had influenced the business mood: "Moves to solve the euro zone crisis are in a critical phase and give firms reason to be cautious... there is deep insecurity, particularly over how this all will affect banks."
Firms expect a significant write-down on Greek debt and support for banks, but are not seeing a credit crunch at the moment.
German business is also adjusting to a phase of weakness and is reducing capacity utilization so it has a buffer, but does not see a sharp decline. Nor do firms plan to cut jobs, Abberger said.
Interest rates cuts were needed, he said, adding he expected the European Central Bank to cut its key interest rate to 1.0 percent in two stages.
(Reporting by Christian Kraemer; writing by Alexandra Hudson)