Germany's Ifo Institute said Monday that it's benchmark business sentiment index improved more than expected this month as manufacturing sector demand notched a significant pickup.

The Munich-based Ifo said its business climate index for Europe's biggest economy rose 0.6 points to 111.0 in December, beating analysts' forecasts of a 110.6 reading and hitting the highest level in nearly three years. It's index of current conditions also improved, rising one point to 116.6 and again topping forecasts of a 115.9 reading. 

"The German economy is in a festive mood," said Ifo president Clemens Fuest. "Assessments of the current business situation improved, reaching their highest level since February 2012. The business outlook for the first half of 2017 is also slightly more optimistic. The German economy is making a strong finish to the year."

The reading follows private-sector data from Markit Economics last week which showed Europe's factories running at their fastest rate of output in more than five years.

Markit's flash estimate manufacturing activity in Germany was measured at 55.5 in December, up from 54.3 in the previous month and the fastest pace in nearly three years, Markit said. In France, the reading was measured at 53.5, well above the 50 mark that separates growth from contraction and the best result in more than five years.

Germany's ZEW Center for European Economic Research in Mannheim also said last week that its key barometer of investor expectations remained unchanged at 13.8 points in December, missing forecasts of a modest rise to 14.