UPDATE 1-German business morale edges up in October

* Ifo says German economy making hesitant recovery

* Business climate index highest since September 2008

* Euro falls after data, which just misses expectations

(Adds economist comment, market reaction, graphic background)

BERLIN, Oct 23 - German business sentiment rose slightly in October to its highest level in over a year, a closely watched survey showed on Friday, pointing to a steady but hesitant recovery in Europe's largest economy.

The Munich-based Ifo economic research institute said its business climate index, based on a monthly survey of some 7,000 firms, rose to 91.9 from 91.3 in September, hitting its highest level since September 2008.

"Overall, the Ifo data confirms that we are in a recovery phase after the crisis but that this will be a recovery with potholes," said DekaBank economist Andreas Scheuerle.

The euro slipped and benchmark euro zone government bonds rose after the index fell just short of the mid-range forecast in a Reuters poll for a reading of 92.0.

The muted rise still added to signs that the economy is recovering steadily after pulling out of its deepest recession since World War Two in the second quarter of this year.

A sub-component on current conditions edged up to 87.3, its highest since December 2008, and another on business expectations rose to 96.8, its highest since May 2008. Earlier on Friday, a purchasing managers' survey showed that a jump in demand boosted German manufacturing activity into expansion for the first time in 15 months in October, driving a slight pickup of private sector growth in the economy.

For a graphic showing the German IFO index and PMI, click here:

http://graphics.thomsonreuters.com/109/DE_IFOPMI1009.gif

Last Friday, the government revised up its gross domestic product (GDP) forecasts for 2009 and 2010, saying Germany was on a recovery path. The Economy Ministry forecast growth of 1.2 percent next year after a 5.0 percent contraction in 2009.

German businesses are cautious about the outlook, however.

BASF, the world's largest chemicals maker, posted forecast-beating quarterly results last week but Chief Executive Juergen Hambrecht, who had repeatedly warned that signs of resurging demand were being overinterpreted, said the recovery was "slow and fragile."

Global economic uncertainty was underlined by official data on Friday showing Britain's economy contracted unexpectedly in the third quarter of this year, making its current recession the longest on record.