* Ifo index fell to 86.4 in March from 88.4 in February

* Iran war impacts German economic recovery, says Ifo's

Fuest

* Decline in headline index driven by falling

expectations

(Updates lead, adds economist comments from paragraph 4)

By Maria Martinez

BERLIN, March 25 (Reuters) - German business morale fell

sharply in March, as the Iran war made companies more

pessimistic and threatened the long-awaited recovery of Europe's

biggest economy.

"The war in Iran has, for the time being, ended hopes of an

economic upswing," said Clemens Fuest, president of the Ifo

institute that on Wednesday said its business climate index fell

to 86.4 in March compared with a revised 88.4 in February.

Analysts had forecast it would drop to 86.1.

"The recovery is stuck in the Strait of Hormuz," said

Sebastian Wanke, economist at KfW, adding that with every week

that the Iran war continues, business sentiment is depressed

further and the economy is held back.

The decline in the headline index was due to significantly

more pessimistic expectations, which fell to 86.0 in March from

90.2 in February as uncertainty among companies increased.

Assessments of the current situation, however, remained

unchanged at 86.7.

WAR COULD DERAIL RECOVERY

"If the war and the closure of the Strait of Hormuz were to

continue for another one or two months, the economic damage to

Germany would be clearly noticeable," said Joerg Kraemer, chief

economist at Commerzbank.

In line with the decline in the Ifo index, the Purchasing

Managers Index on Tuesday showed Germany's private sector growth

slowed to its weakest pace in three months in March as services

lost momentum and the Middle East conflict drove freight and

energy costs higher.

"The fall in the German Ifo index and the composite PMI in

March suggest that the renewed rise in energy prices could

derail the tentative recovery in the German economy," said

Franziska Palmas, senior Europe economist at Capital Economics.

While the Ifo business climate index fell across all

sectors, the PMIs showed an improvement in manufacturing

activity and a deterioration in services.

Palmas said Germany will be more resilient than in 2022

because the rise in energy prices has been much smaller so far

and a lot of the least profitable energy-intensive production

has already been permanently lost.

"But GDP may still stagnate in the middle of the year," she

said, cutting forecasts to 0.5% growth from 0.8% before the

conflict started.