* Thomson Reuters & OeKB index drops to -10 from 29
* 44 percent of firms expect CEE business conditions to worsen
* Worst swings in Russia, Ukraine; real estate, transport
* Banks keep up funding levels of E.Europe subsidiaries
By Sarah Marsh
VIENNA, March 10 (Reuters) - Business sentiment in central and eastern Europe plunged this winter, and almost half of foreign firms operating there believe it will worsen in the next six months, according to a survey released on Tuesday.
The quarterly Thomson Reuters & OeKB Central and Eastern European Business Climate index indicated foreign investment would virtually disappear from the hard hit region, but foreign-owned banks would not pull out en masse.
The survey fell to minus 10 in January, from plus 29 in October, with the worst swings of morale in Ukraine and Russia and in the real estate and transport sectors. When the index falls below zero, it shows corporate morale is negative.
The poll of 400 international firms managing 1,400 companies was taken as the global financial crisis ripped into emerging Europe, hammering industry and causing currency, stock and bond markets to plunge in a region previously considered one of the safest in emerging markets.
A broad selloff of emerging European assets accelerated at the start of the year, and the business climate turned negative for every country surveyed by Austrian export financing bank Oesterreichische Kontrollbank (OeKB), which compiles the index.
"Foreign direct investors judge the current business situation of their operations there to be significantly worse than in October," OeKB said. "Above all, future performance is seen as anything but rosy: 44 percent expect a further worsening of business conditions in the coming six months, compared to 16 percent in October."
The survey showed the business climate had soured most in Ukraine -- still among the top scorers three months ago -- where political turmoil has delayed policymaking to combat the crisis and has stalled an International Monetary Fund bailout.
Business climate also dropped sharply in Russia -- equally one of the best performers in the previous survey -- where a drop in oil prices, lower demand for exports and a severe credit crunch is hitting businesses.
The second lowest business climate reading was for Hungary, which secured a $25.1 billion rescue loan from the International Monetary Fund, the EU and the World Bank last October. Its forint currency hit an all-time low against the euro last week.
By industry sectors, business climate was worst in the real estate sector, which had fuelled the boom particularly the Baltic states and Balkans over the last few years, and among transport firms, which are strongly linked to exports.
REDUCING EXPOSURE
Investment was falling across the region, the survey showed, again sharpest in Ukraine and Russia. Bulgaria, the Czech Republic and Romania showed the least drop, while the worst hit sectors were real estate and industry.
"In view of the economic crisis and the sharply cooler business climate in central and eastern Europe, companies have become a lot more careful with their investment strategies," OeKB said.
Foreign banks, crucial for the region because they provide practically the only remaining source of funds, did not appear to be planning a mass retreat from emerging Europe and were sticking to their long-term investment plans.
They were looking to expand 18 percent of eastern European subsidiaries, while reducing financing for some 17 percent. Investment funds for 65 percent of the emerging European units will remain unchanged, OeKB said.
Among the sectors most keen on reducing exposure to eastern Europe were the real estate and manufacturing sectors.
Some 43 percent of companies in the real estate sector, which suffered one of the worse drops in business climate, and 30 percent of industrial companies aimed to withdraw capital from emerging Europe, OeKB said.
The quarterly survey was first published in January 2007.
NOTE - Distributed exclusively on the Reuters System, the Thomson Reuters & OeKB Central European Business Climate Index is based on quarterly surveys of 400 international companies with regional headquarters in Austria, which manage 1,400 affiliate companies in 19 countries in central and Eastern Europe.