BERLIN (Reuters) -Business morale in Germany unexpectedly stagnated in February, a survey showed on Monday, dealing a tough hand to a future government after Sunday's election in which parties promised to lift Europe's top economy out of a perpetual downturn.

The Ifo institute said its business climate index remained flat at 85.2 in February after revising the January reading up slightly to the same figure.

Analysts polled by Reuters had forecast a second monthly rise in the reading to 85.8.

Sunday's election delivered a win to the conservative CDU/CSU opposition of Friedrich Merz, who has promised to cut red tape, encourage investment and bring down energy prices to boost Germany's shrinking economy.

Ifo's current conditions index fell unexpectedly to 85.0 in February from 86.0 in January, while the expectations index rose to 85.4 from 84.3, according to the Munich-based institute's monthly survey of some 9,000 companies.

COALITION TALKS

"The German economy is in waiting," said Ifo president Clemens Fuest, as the country enters a phase of government-building talks in which a grand coalition appears the most likely outcome.

Analysts have pointed to some signs of stability on the horizon but also warned that a strong opposition made up of parties on the far left and right may complicate efforts for reform, for example of the country's debt rules that limit spending.

"It is important that the new government takes swift action to stimulate the economy. The prerequisite for this is that there are rapid coalition negotiations with a positive outcome," said Thomas Gitzel, chief economist at VP Bank Group.

"The figure emphasises that the German economy has hit rock bottom and that growth-friendly reforms are urgently needed," said Jens-Oliver Niklasch, senior economist at the LBBW bank, adding however that sluggish foreign trade was not a problem easily solved domestically.

"A real improvement in the economy can only be expected in the second half of the year at best. For the current year, we continue to expect a renewed contraction in economic output," Niklasch added.

Europe's largest economy is smarting from two consecutive years of decline. Another contraction in 2025 would mark the longest period of weakness in the country's post-war history.