Euro zone banks expect to continue to toughen lending rules in the third quarter, a European Central Bank survey showed today, dashing hopes the low point in the credit downturn had passed.

But analysts pointed to the timing of the survey as an important factor and warned over-interpreting the sentiment at the height of the sovereign credit crisis, which has eased since.

Two key German surveys also showed fears that tight credit conditions could hamper recovery in Europe's largest economy were fading, with companies reporting easier access to loans and banks expecting lending to rise.

The ECB's quarterly bank lending survey showed that a net 5 percent of banks expect to stiffen lending rules for firms between July and September, after a far greater than originally expected 11 percent did so in Q2.

Demand, however, is expected to pick up in the coming months, suggesting the potential for a credit crunch as firms battle to get access to the capital they need to fund investment and the economic recovery.

"The factors contributing to the reinforced net tightening of loans to enterprises relate to the deterioration of banks' own balance sheet situation, particularly as regards their liquidity position and access to wholesale funding," the ECB survey said.

"The negative spillover effects from the sovereign debt crisis appear to have worsened banks' ability to obtain funding."

Analysts said recent debt market woes that have hit Greece and other highly indebted euro zone countries were a key factor in the downbeat tone of the survey. But there has been some evidence of those tensions easing, with Spain's cost of borrowing falling at a tender this week and optimism over the recovery suggesting banks balance sheets may be weighed down by fewer defaults than earlier expected. "This (survey) is of course disappointing taken that banks were clearly expecting a normalisation of credit standards in the last bank lending survey and that did not happen," said Deutsche Bank economist Gilles Moec. "I would not be too pessimistic though. In my view it is kind of a knee-jerk reaction to the difficulties in the market in June." On a net basis, 29 percent of the 120 banks surveyed between June 14 and July 2 expected loan demand from firms to increase in the next three months, particularly among small and medium-sized companies. Lending to firms is seen as crucial to economic health. It has slumped since the onset of the financial crisis but economists hope to see an improvement in the wake of strong recent euro zone data. Analysts said stricter credit could hamper the recovery, but cautioned the data should not be interpreted in isolation. "Of course it (the tightening of credit standards) would be a risk factor, were it to continue, but the problems were key in explaining the unexpected tightening," said Nordea analyst Jan Von Gerich. "The results are not very encouraging, but there is a clear reason why this happened and we have a reason to be more optimistic as the situation has improved." Consumer lending rules typically turn before corporate lending after a downturn, but a steady net 10 percent of banks continued to stiffen their mortgage lending standards in Q2 with slightly more expecting to toughen them than relax them in the third quarter. Demand for mortgage loans for home purchase rose at a net 24 percent of banks, compared with an expectation of a 2 percent fall three months earlier. However, only a net 5 percent of banks see demand increasing further in the current quarter. The ECB also said the sovereign debt crisis had hit banks' access to short-term money markets particularly hard, adding that banks expected the problems to persist. "Over the next three months, banks expect that the current difficulties in accessing wholesale funding will remain, although not to the same extent as observed in the second quarter of 2010," it said. (C ) Reuters