(Updates with fourth-quarter estimate from first paragraph.)

Jan. 11 (Bloomberg) -- The German economy probably contracted in the final quarter of 2011 as the sovereign debt crisis damped demand for exports.

Europe’s largest economy shrank “roughly” 0.25 percent in the fourth quarter from the third, the Federal Statistics Office in Wiesbaden said today, adding it may revise its assessment by the time official data are published on Feb. 15. Growth slowed to 3 percent in 2011 from 3.7 percent in 2010, which was the most since German reunification two decades ago, the office said. Germany’s budget deficit amounted to 1 percent of gross domestic product last year.

German growth is slowing as the weaker global economy and waning demand from debt-stricken euro-area neighbors erodes foreign sales. Germany may still avoid a recession as unemployment at a two-decade low supports consumer spending.

“Last year was a good year even if the situation deteriorated toward the end of 2011,” said Aline Schuiling, an economist at ABN Amro in Amsterdam. “While the industrial sector has suffered a blow from the sovereign debt crisis, more resilient domestic demand could prevent the economy from contracting too strongly.”

Domestic demand was the main contributor to GDP growth last year, adding 2.1 percentage points, the statistics office said. Private consumption increased 1.5 percent in the year, while government spending rose 1.2 percent. Investment in plant and machinery gained 8.3 percent.

Net Trade

Net trade contributed 0.8 percentage points to growth, with exports up 8.2 percent and imports gaining 7.2 percent. In 2010 exports increased 13.7 percent.

Continental AG, Europe’s second-biggest car-parts maker, said on Dec. 29 that revenue in the fourth quarter will be slightly higher than in the third as the company’s tire and electronics businesses grew faster than competitors.

At the same time, Fresenius Medical Care AG, the world’s biggest provider of kidney dialysis, on Dec. 20 cut its 2011 revenue forecast, blaming the weaker euro.

“Last year we had more and more evidence that the recovery was broadening out, with domestic demand and investment strong,” said Jens Sondergaard, senior economist at Nomura International Plc in London. “There’s a constant tug-of-war between the positive of domestic demand and the negative drag of the sovereign debt crisis.”

--With assistance from Gabi Thesing in London, Jana Randow in Wiesbaden and Sheenagh Matthews and Alex Webb in Frankfurt. Editors: Matthew Brockett, Simone Meier

To contact the reporters on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net; Jana Randow in Frankfurt at jrandow@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net