(Adds detail, BOI survey detail, economist comment)
By Marc Jones and Paul Carrel
FRANKFURT, Nov 7 (Reuters) - Banks significantly tightened their lending rules for euro zone businesses in the third quarter and expect funding to become still tougher after the recent financial turmoil, the European Central Bank said on Friday.
"Banks reported that, as a result of the financial turmoil, the credit standards applied to loans to large enterprises and SMEs were tightened further," the ECB said in its latest quarterly report on bank lending.
"Large firms continued to be more heavily affected by the financial market situation than SMEs."
The results were based on responses from banks between Sept. 23 and Oct. 7, the peak of the recent intensification of the financial storm.
Banks said funding costs and balance sheet constraints contributed to the net tightening in Q3, impacting their ability to access market financing, while market worries were also weighing heavily.
"The most important factors in this (Q3) net tightening remained the expectations regarding future economic activity and the industry or firm specific outlook," the report said.
The net tightening in general credit standards was the fifth in a row and the ECB said banks saw access to funding becoming even tougher in the coming months following the recent troubles.
"As regards the next three months, banks reported that they expect their hampered access to money markets and debt securities markets to have a greater impact on their willingness to lend and their margins," the ECB said.
MORTGAGE LENDING
The survey also pointed to a stronger net tightening of credit standards for loans to home buyers in the fourth quarter after a mild increase in Q3.
Standards were also likely to tighten for consumer credit and other lending to households it said.
The results were published a day after the ECB cut interest rates by 50 basis points and signalled another reduction was possible this year as the euro zone faces its first recession.
"The euro area is experiencing the most severe credit crisis since its inception and the real economy risks a more severe recession than the already ongoing one, because of a freezing in the funds channelled to businesses and households," said Aurelio Maccario, chief euro zone economist at UniCredit.
Maccario said the survey painted a "very gloomy scenario" for lending in the euro area and analysts are also worried that data is being distorted by companies drawing on pre-credit crisis borrowing lines that in normal times they would not have tapped.
They say it is covering up the fact that banks are actually reining in their lending in the wake of the credit crisis and warn it is adding extra pressure on the balance sheets of already cash-strapped banks.
Separately, a Bundesbank survey showed banks in Germany, Europe's largest economy, tightened their lending standards in the third quarter, particularly for businesses, and expected to toughen up their lending rules again in the fourth quarter.
A Bank of Italy report mirrored the ECB and Bundesbank surveys and said tensions in financial markets were expected to persist at "elevated levels" for the rest of the year.
For full report go to ECB Web site. http://www.ecb.int/stats/money/lend/html/index.en.html (Reporting by Marc Jones and Paul Carrel, editing by Mike Peacock and Andy Bruce)