By Maria Martinez

BERLIN (Reuters) -German business morale improved more than expected in June, a survey showed on Tuesday, potentially marking a turning point for Europe's biggest economy as lower borrowing costs and the government's fiscal package boost confidence.

The Ifo Institute said its business climate index rose to 88.4 in June from 87.5 in May, ahead of the 88.2 reading analysts forecast in a Reuters poll, with the services sector showing the strongest improvement.

"The German economy is slowly gaining confidence," Ifo president Clemens Fuest said.

A jump in the expectations index to 90.7 from 89.0 accounted for most of the improvement, which Joerg Kraemer, chief economist at Commerzbank attributed primarily to the new government's huge fiscal package and falling euro zone interest rates.

"The sixth consecutive rise in the Ifo business climate is a clear signal that the economic low is behind us," Kraemer said.

Germany is the only Group of Seven nation to record no economic growth for two consecutive years and its export-oriented economy risks another contraction because of tariffs rolled out or threatened by President Donald Trump's administration.

The new conservative-led government is seeking to avert that with a 46 billion euro tax relief package and other measures.

Ifo's assessment of the current situation improved only marginally to 86.2 in June from 86.1.

Alexander Krueger, economist at Hauck Aufhaeuser Lampe private bank, blamed the weak current conditions index in part on volatile Middle East, which in recent weeks witnessed an aerial war between Israel and Iran and U.S. strikes on Iranian nuclear facilities.

"It is obvious that the events in the Middle East have weighed on sentiment," Krueger said.

A separate Purchasing Managers' Index survey on Monday showed that business activity in Germany returned to growth in June, driven by a recovering manufacturing sector that reported its strongest increase in new orders in over three years.

(Reporting by Maria Martinez, Editing by Friederike Heine, Miranda Murray and Tomasz Janowski)