FEWER EURO-ZONE banks tightened lending conditions in the second quarter than in the first quarter as better financial market conditions appeared to ease the flow of funds to financial institutions, a survey by the European Central Bank (ECB) has found.

However, more lending officers of the 112 banks polled for the survey cited worries about economic woes - rather than market turbulence - as a reason for stricter credit standards, while a growing number said rules would tighten further in the coming months.

The ECB said the most important factor in tightening credit rules in the last quarter "continued to be a deterioration in expectations about the economic outlook".

More banks were likely to tighten lending conditions in the current quarter.

The findings of the ECB's quarterly bank lending survey chime with recent economic data from the 15-member euro zone, suggesting that growth is declining rapidly, given high energy prices and slowing growth around the world.

Aurelio Maccario, an economist at UniCredit, said he was sure the euro-zone credit cycle had already turned.

"The biggest risk is that the slowdown [of credit growth] becomes progressively faster, hitting the investment outlook," he said.

Two weeks ago, the ECB revealed that the growth of loans flowing from euro-zone banks to business was still growing strongly, at an annualised rate of 13.6 per cent in June.

However, this was already off the record 15 per cent rate in March.

Yesterday's survey suggested the trend might continue as 32 per cent of banks - two points more than last time - reported fewer inquiries for business loans in spring.

Meanwhile, 30 per cent of respondents said they also expected less demand in the third quarter.

At the same time, 46 per cent of the banks polled said they expected conditions for business loans to tighten, up a point from their last three-month forecast in April.

Other banks saw no change either to demand or credit conditions.

"Overall," the ECB said, "responding banks felt the wholesale funding situation had improved somewhat compared with the situation in the previous quarter," and access to money markets and debt-security markets should remain as good this quarter.

Luigi Speranza, an economist at BNP Paribas, said yesterday that this was "moderately encouraging against a backdrop of weakening growth". - ( Financial Times service)