The Munich-based Ifo economic institute said on Monday its business climate index, based on a monthly survey of some 7,000 firms, fell to 107.3 from a downwardly revised 108.6 in December.
The reading was below all forecasts in a Reuters poll, which had pointed to a dip to 108.4.
"German businesses are frightened at the start of the new year," Ifo economist Klaus Wohlrabe told Reuters. "Germany cannot completely de-couple from the downward dynamic in emerging markets."
The drop took business sentiment to its lowest level since February last year and came as global policymakers struggle to deal with myriad risks - from China's economic slowdown, to Europe's refugee influx and Middle East conflicts.
An index on morale in the manufacturing sector, the backbone of Germany's export industry, fell to a 12-month low.
Dekabank economist Andreas Scheuerle said there was growing concern that weak oil prices reflected a weaker world economy.
"Companies have for a long time appeared protected from rising risk," he said. "Now a bit more realism is taking hold."
The bleak Ifo outlook came after a separate survey last week showed the mood among German analysts and investors had also deteriorated in January, as a slowdown in China and other emerging markets clouded the economic outlook.
The German government expects the economy to grow by 1.8 percent this year, although magazine Der Spiegel reported on Friday that Berlin has slightly reduced this year's expected growth rate by 0.1 percentage points to 1.7 percent.
One bright spot in the Ifo survey was resilience in domestic consumption, with retailers' expectations rising.
German businesses can take also some comfort from European Central Bank President Mario Draghi's remarks last week that the bank had plenty of instruments at its disposal to push euro zone inflation higher and was both determined and willing to act.
(Additional reporting by Michelle Martin, Tina Bellon and Joseph Nasr; editing by Dominic Evans)
By Paul Carrel and Jörn Poltz
