German business confidence dipped slightly below last month's record high but remains "excellent", a closely-watched survey found Tuesday, as Europe's top economy ends 2017 in a party mood.

The Ifo economic institute's business climate index hit 117.2 points in December, slightly below November's historic 117.5 points.

"German businesses are full of festive spirit," Ifo president Clemens Fuest said in a statement.

The reading came in below expectations however, as analysts surveyed by Factset had predicted the index would hit another high.

"Sentiment among German businesses is excellent ahead of Christmas, but no longer quite as euphoric as last month," said Fuest.

Businesses were more optimistic about their current economic situation than in November, the survey of some 7,000 firms showed, but they expressed greater wariness about the future.

The more pessimistic outlook comes as Germany remains mired in a political stalemate, with Chancellor Angela Merkel still trying to form a new government after coalition talks collapsed last month.

The "sharp drop" in business expectations "suggests that German businesses do seem to care about politics," said economist Carsten Brzeski of ING Diba bank.

Looking at the Ifo index in detail, manufacturing firms, retailers and wholesalers were all less cheerful about their prospects.

Only construction firms reported a brighter outlook for the months ahead.

The latest data caps a euphoric year for the German economy, with brisk domestic and foreign demand powered by record-low unemployment at home, low interest rates and a strengthening global recovery.

The German government recently upgraded its economic growth forecast for 2017 from 1.5 to 2.0 percent.

The Bundesbank central bank is even more bullish and last week raised its 2017 estimate from 1.9 to 2.6 percent.

For 2018, it is forecasting 2.5 percent growth.

"It will be hard for the German economy to beat its own expectations in 2018," said Brzeski.

"But strong fundamentals and the accelerating growth momentum in the entire eurozone suggest that it is not impossible, and that the German economy is all-set for another strong year. However, some uncertainty remains," he added.

Merkel's conservatives will now begin exploratory talks with the Social Democrats, after they were coaxed away from their plan to go into the opposition.

A new government however is still seen as months away.