Production was strong in the first three months of the year despite a bigger-than-expected drop in March and the overall robust readout is likely to heat up debate about how Germany's strong exports are fuelling global economic imbalances.

The United States has for years called for Germany and other countries with current account surpluses to do more to boost lacklustre domestic demand.

The Organisation for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) have also urged Germany to step up public and private investment in infrastructure to reduce its current account surplus.

Industrial output fell by 1.3 percent in March, the strongest monthly decline since August 2014, data from the Economy Ministry showed. The figure came in below the consensus forecast in a Reuters poll for a 0.2 percent fall.

In the first three months of the year, output rose by 1.8 percent on the quarter, driven mainly by a strong hike in construction activity and higher demand for capital goods.

"Despite March's sharp fall in German industrial production, the sector appears to have contributed strongly to GDP growth in Q1," Capital Economics analyst Jennifer McKeown said, adding the German economy may even have outpaced the 0.6 percent average growth for the euro zone as a whole in the first quarter.

The Federal Statistics Office will publish preliminary data for gross domestic product (GDP) in the first quarter on Friday.

Leading economic institutes have said the economy probably expanded by around 0.6 percent on the quarter in the January-March period - twice as much as in the fourth quarter.

"The industrial sector has overcome its foreign trade related weak phase of the second half of 2015," the Economy Ministry said. "The economic trend in the industrial sector is currently pointing upward."

STRONG EXPORTS

Separate data from the Federal Statistics Office showed that seasonally adjusted exports rose by a bigger-than-expected 1.9 percent in March while imports fell by a bigger-than-expected 2.3 percent, widening the seasonally adjusted trade surplus to a new monthly record of 23.6 billion euros ($26.82 billion).

The wider current account surplus also hit a fresh monthly record of 30.4 billion euros on an unadjusted basis.

"The strong increase in exports shows that the cooling of the global economy cannot have been as severe as some feared at the beginning of the year," ING economist Carsten Brzeski said.

He pointed out that, at least in the first two months of the year, France has again taken the number one spot as Germany's most important export destination while the United States has dropped to number two.

In 2015, the German economy grew by 1.7 percent, the strongest rate in four years, driven mainly by strong private consumption and higher state spending on refugees and infrastructure.

It is expected to grow by around the same amount this year, despite concerns about weaker foreign demand for German goods due to an economic slowdown in China and other emerging markets.

The data came after factory orders rose more than expected in March due to buoyant foreign demand especially from countries outside the euro zone, suggesting that a strong start to the year for the German economy may extend into the second quarter.

(Reporting by Michael Nienaber; Editing by Paul Carrel and Alison Williams)

By Michael Nienaber