FRANKFURT -- German banks are trapped in a vicious economic circle -- strangled by a string of client bankruptcies, they are lending less, risking an aggravation in the economic downturn that has pushed them into the red.

The deteriorating situation in Europe's largest economy offers little shelter. A key advisory panel to the government this week predicted economic growth of 0.2 percent in 2002 and 1.0 percent in 2003, compared with a European Union average forecast of 0.8 and 1.8 percent, respectively.

The scale of the pain in Germany's banking sector became clear in the space of two weeks in the corporate results season, as the country's major financial institutions outdid themselves reporting colossal losses, AFP reported.

HypoVereinsbank, the second-biggest German bank, kicked off the blood-letting. On October 23, it posted its first net loss -- of 360 million euros -- in the third-quarter.

Deutsche Bank, the industry giant, followed a week later with a third-quarter loss of 169 million euros. Then this week Commerzbank, the number-four bank, reported third-quarter red ink of 133 million euros.

The dubious prize, however, goes to Dresdner Bank, the main drag on its insurer parent Allianz, which announced a record loss of 2.5 billion euros Thursday.

The source of the sector pain: dubious loans -- loans that may not be repaid because of a rise in German corporate bankruptcies.

More than 40,000 bankruptcies are expected this year under the difficult economic conditions.

The banks need to raise their reserves to protect themselves, a process that will cost more than three billion euros this year for HypoVereinsbank alone.

The logical reaction: banks will balk before lending more.

HypoVereinsbank has seen its debt portfolio, the fattest in Europe, shrink to 445 billion euros from 451.3 billion in the past nine months.

Veronique Riches-Flores, an economist at Societe Generale, confirmed "a certain rationing of credit offers" in a study on the German economy. The volume of loans in Germany grew more than an annual seven percent in the 1990s. But in the Bundesbank's latest evaluation, the rate had slipped below one percent.

According to a recent survey of small and medium-sized businesses by the university of Hamburg, 60 percent of the companies posting losses no longer were getting additional loans from their banks.

"The small and medium-sized businesses cannot really count on the support of their banks when they go through a difficult period," said the co-author of the study, Christian-Marc Ringle. And with the current depression in equity markets, it does not make sense to try to boost finances through the capital markets.

A Frankfurt analyst predicted: "After the bankruptcies of large companies this year, like (construction group) Holzmann, the banks will have to face the failures of small and medium-sized businesses for which they don't want to allow extensions" of credit. CDC Ixis economist Patrick Artus noted the crisis buffeting German banks would result in "a reduced negotiating position for businesses."

Volker Schmidtchen, president of the federation of small and medium-sized businesses in norther Germany, said companies were having a difficult time coping with the new relationship with their banks.

"The banks have new demands. they want a business plan with two-year forecast on sales, profit. But we don't have the experience to produce this type of documents," Schmidtchen said.

"Before, the banks knew us well. If a company had high-value real estate as collateral, they took that into account and raise the amount of the loans. Now, banks no longer pay any attention to this type of detail," he said.

His remarks confirmed the Hamburg study: 30 percent of the company owners interviewed said their banking relationship had worsened in the past two years.

This growing alienation is altering the legendary symbiosis between German banks and businesses, a tightly knit cooperation that sustained Germany's stunning economic recovery after World War II.