Analysts and retail lobbyists also said they expected a rise in private consumption and nominal retail sales for the full year 2006 on the back of a stronger economy and one-off effects such as the World Cup soccer finals and a planned sales tax hike.
Nuremberg-based GfK's forward-looking consumer sentiment gauge, based on a survey of around 2,000 Germans, rose to 3.8 for January -- outstripping analysts' expectations and jumping from an upwardly revised 3.4 in December.
The stronger-than-expected numbers weighed on bond prices while the euro gained ground against the dollar.
"It was quite a significant (euro) move. In a way the German number that we got is pretty encouraging for domestic demand in Germany, which is the missing link in the recovery," said Barclays currency strategist Petya Koeva.
A Reuters poll of 16 economists had produced a median prediction of 3.3 with forecasts ranging from 3.0 to 3.5 and compared with the previously reported December level of 3.1.
GfK attributed the sharp improvement in overall sentiment to confidence in the new government, which took office in November after lengthy coalition negotiations. But economists singled out its plans to raise value-added tax on January 1, 2007, as a factor weighing on people's minds.
The reading for willingness to buy was 2.1 in December, which is both the highest level in four years and the first positive result in that period.
"The end of the coalition talks certainly played a role," said GfK economist Rolf Buerkl in an interview with Reuters. "This has clarified to the consumer what financial burdens and support they can expect in the future and in which timeframe. This makes the planning of bigger purchases easier."
In a breakdown of its survey, GfK said consumers' expectations for the economic cycle over the coming 12 months stood at 11.9 in December -- the highest since July 2002 when it reached 12.4 -- and followed up a three-month rally which was interrupted by a November dip to -8.6.
"The consumers seem to have faith that the government can put out the right, positive signals to support the economic recovery on the basis of good export numbers and increasing private investments," GfK said in a statement.
Economists remained sceptical, attributing the boost to short-term factors like Christmas.
"We will see a further stabilisation in private consumption. But one should not be euphoric. The basic parameters do not point toward a boost in consumption," said SEB economist Klaus Schruefer.
Household spending has been weak for years amid high unemployment, which hit a post-war record earlier this year.
The GfK data showed consumers' assessment of their own financial prospects remained muted at -11.3 for December compared to -12.9 in November.
For 2006 Buerkl expected a slight increase in private consumption. "Under current conditions we expect that private consumption could increase by 0.5 percent" after stagnation or a slight decline in 2005, he said.
"The perspectives for consumer sentiment over the next year have improved. But it remains to be seen if we can call this a turnaround," he said.
Retail association HDE said it expected nominal sales to rise in 2006, yet added that the increase would not be strong enough to translate into a rise in inflation-adjusted sales.
"We now expect that on balance things could improve slightly in 2006," HDE spokesman Hubertus Pellengahr said.
Soccer goods had already been flying off the shelves during the Christmas sales period and he expected advance purchases before the three percentage point increase in VAT to 19 percent at the start of 2007.
"In addition the more optimistic growth forecasts give hope for the labour market, which should encourage people to spend in the shops," Pellengahr said.
But GfK added that rising fuel prices could also hamper consumer spending in 2006. Gas and electricity prices in many parts of Germany are set to rise by up to 12 percent on January 1.