Europe's powerhouse economy is expected to hit a setback in the coming months, reflecting a "high degree of nervousness over the future path of growth in Germany".
The assessment of current economic conditions in the eurozone, however, reached its highest point since January 2008.
Germany's ZEW institute published its August survey on economic sentiment on Tuesday for both the German economy and that of the overall eurozone.
German expectations fall
The ZEW indicator for economic sentiment in Germany fell by 7.5 points to stand at 10, significantly below the long-term average of 23.8. Its assessment of current conditions increased by 0.3 points to hit 86.7 points.
Analysts had expected the headline sentiment index to drop just 2.5 points to 15, but the current conditions index was expected to dip to 85.5.
"Weaker than expected German exports as well as the widening scandal in the German automobile sector in particular have helped contribute to this situation," said Achim Wambach, president of the ZEW Institute.
Claus Vistesen at Pantheon Macroeconomics said: "Across industries analysts’ sentiment for auto makers plunged in line with ongoing chaos surrounding 'diesel gate'."
Eurozone currently riding high
There was a similar drop in the outlook for the eurozone, ZEW said. The expectations index dropped 6.3 points to 29.3. This was a lower fall than 34.2 reading forecast by analysts.
Current economic conditions, however, soared to 38.4 points, 9.7 points higher than in July, and its highest level since January 2008.
The reaction in the markets was mixed. Investors were happy to use recent dollar bullishness to sell the euro.
The single currency fell 0.5% to $1.1759 against the dollar, but was flat against sterling at €1.0915.
Equity markets, however, remained buoyant. The pan-European Euro-Stoxx 50 index rose 0.5% to 3,441.71, while Germany's own Xetra Dax index added 0.7% to 12,149.7.