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Long distance identification was very unreliable, the British also initially confused Prinz Eugen for Bismarck because they expected the latter to be leading German formation.
 
German CAs and BBs been build very similar by design so they can be easily confused.
 
but i'd imagine even at long range a battleship should seem bigger than a cruiser.
Only if you know the exact distance of both targets. Like with an air target there are not many landmarks to compare size with at sea.
 
I dont doubt your source, but...how do you confuse a ship with a quad turret on the front for a cruiser? I'm not sure how much of the ship was visible with optics of the time, but i'd imagine even at long range a battleship should seem bigger than a cruiser.

At the range of the spotting and identification (20 km) I doubt that the hull and turret details were even visible due to the weather and curvature of the earth. The identification was probably made based on the shape and configuration of the superstructure and funnels alone. Spotting a tiny detail like the number of gun barrels in a turret would require you to be MUCH closer - possibly closer than the ranges the engagement actually took place at.
 
At closer ranges (where you can see the hull without it being obscured below the horizon), German camouflage was designed to confuse the starting and ending points of the ship, so it was difficult to tell if that was an escort partly in front of it, two capital ships, or a longer hull. At that range, however, you can probably start making out the turrets and gun barrels anyway.