WASHINGTON –  Banks in the U.S. kept credit fairly tight in the final months of 2011 even as demand for loans rose, a move that's likely to put a brake on the already slow economic recovery.

The Federal Reserve's quarterly survey showed that credit standards on commercial and industrial loans were little changed despite banks reporting an increase in loan demand especially from small companies, which rely heavily on bank financing to grow.

Like in the previous third-quarter survey, Europe's financial turmoil led U.S. banks to tighten credit to Europe. The good news for U.S. banks is that they appear to be taking advantage of their European counterparts' troubles.

Banks in the U.S. started to tighten credit in the second half of 2011 as Europe's debt crisis worsened, following almost two years of easier standards on business loans. The tighter credit conditions could hurt the fragile recovery, which has only recently shown signs of improvement.

Of the 56 domestic banks surveyed -- which received the questions on or after Dec. 21 and responded before Jan. 10 -- the Fed said 53 reported lending conditions to big and mid-sized firms had remained basically unchanged over the past three months. Three said they had "tightened somewhat." This was the first credit tightening since the final quarter of 2009.

Meanwhile, the 23 U.S. branches of foreign banks that were interviewed, which mainly lend to businesses, reported a tightening of their standards.

A few banks eased standards on consumer and auto loans over the past three months as demand for credit card and car loans increased. But the vast majority of lenders didn't change credit conditions on loans to small companies, or those with annual sales of less than $50 million.

While most big companies have enough cash to expand or can use the bond markets to raise funds, small firms often need to borrow from banks if they want to grow.

The central bank posed a special set of questions about lending to European-based banks amid that continent's sovereign-debt crisis. More than half of banks in the U.S. that make loans to European banks tightened standards, with nearly 20% saying terms had been tightened considerably.

U.S. banks also said credit was tightened to non-financial companies that have operations in the U.S. and a significant exposure to European economies. Almost 40% of the respondents in this category said credit was tightened "somewhat."

However, the European debt crisis may be benefiting U.S. lenders. About half of those surveyed who compete with European banks noted an increase in business as a result of less competition from European institutions.

Copyright © 2012 Dow Jones Newswires