German industrial output posted its biggest monthly increase since March 2012 in July, rising far more than forecast and marking a strong start to the third quarter for a key sector of Europe's powerhouse economy.

Industrial production increased by 1.9 per cent in July after a shaky second quarter in which it fell in two out of three months, data from the Economy Ministry showed yesterday.

That beat the consensus forecast in a Reuters poll for a 0.3 per cent increase and overshot even the highest estimate of a 1.5 per cent rise.

'German industrial production rebounded in July, providing further evidence that the euro zone's largest economy should return to growth in the third quarter,' said Carsten Brzeski, senior economist at ING.

The German economy shrank by 0.2 per cent in the second quarter due to weak investment and slow trade, leading some economists to warn that there is a risk that Germany will fall into recession in the July-September period.

Sentiment indicators have also cooled on concerns about the Ukraine crisis, but hard data have been more upbeat, with figures showing industry orders rose at their strongest rate in more than a year in July.

'This week's industrial data encourage our view that the contraction in the second quarter was rather a one-off than the start of a trend downturn,' Brzeski said.

Factories churned out 5 per cent more capital goods, especially cars, and produced 0.8 per cent more intermediate goods. Construction also posted a hefty increase, though energy production fell.

'The manufacturing industry had an encouraging start to the third quarter,' the Economy Ministry said.

The ministry added that late summer holidays had noticeably boosted output in July but said the data nonetheless pointed to a continuation of the positive basic trend in manufacturing, 'to the extent that geopolitical developments allow'.

There may be a slowdown towards the end of the quarter, however, after a purchasing managers' survey published this week showed Germany's private sector expanded at its slowest pace in 10 months in August as manufacturing grew at a weaker rate.

The output data for June was revised up to a gain of 0.4 per cent from a previously reported increase of 0.3 per cent.-Reuters