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Die Unendliche Geschichte (The Neverending Story) by Michael Ende.
If you're rolling your eyes because of the film adaptation, I encourage you to give the book a chance. It's a multi-layered story that can be enjoyed just as much by adults as by children. I think it reads better in the original German (German seems better suited to made-up words), but the Ralph Mannheim English translation is decent, if a bit clunky in parts.
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