BERLIN - German business morale deteriorated more than expected in May due mainly to a plunge in services sector confidence, a survey showed, suggesting that Europe's largest economy is losing steam after solid growth at the start of the year.

The Ifo institute said on Thursday its closely-watched business climate index fell to 97.9 from a confirmed 99.2 in the previous month. The May reading compared with a consensus forecast for 99.1.

"The German economy is still lacking in momentum," Ifo President Clemens Fuest said, adding that a fall in managers' assessment of current business conditions was the main reason for the overall decline.

"In the services (sector), the business climate took a substantial hit," Fuest said, with Ifo's sub indicator of current sentiment in services posting its biggest monthly drop since April 2013.

In construction, the business climate improved for the third time in a row as already upbeat assessments of the current business situation improved further. "The construction boom continues," Fuest said.

The survey followed gross domestic product data released earlier on Thursday that showed household spending rose at its strongest pace in eight years, driving a rebound of 0.4% quarter-on-quarter growth in the first quarter.

A pick-up in construction activity and surprisingly solid exports also helped Europe's largest economy to get back on track in the first three months of the year, the figures from the Federal Statistics Office showed. 

(Reporting by Michael Nienaber, editing by Paul Carrel) ((michael.nienaber@thomsonreuters.com; +49 30 2888 5085; Reuters Messaging: michael.nienaber.reuters.com@reuters.net www.twitter.com/REUTERS_DE www.reuters.de))