UPDATE 2-Euro zone bank credit tightening eased in Q3 -ECB

* Fewer banks tightened credit standards in Q3 than in Q2

* Tightening seen at turning point, ending in Q4

* Banks had easier access to wholesale financing

FRANKFURT, Oct 28 - Credit tightening by euro zone banks has reached a turning point, the European Central Bank said on Wednesday, after a survey showed fewer banks are setting tougher loan standards.

Banks continued to tighten credit standards in the third quarter but less than they did in the previous quarter, with the relaxation bigger for firms than for households.

"This development thus further confirms the indications of a turning point in the tightening trend observed at the time of the April 2009 survey," the ECB said.

"At the same time, it needs to be kept in mind that the cumulated net tightening during the financial turmoil has not yet started to reverse itself and remains very substantial."

For the fourth quarter, slightly more banks expected to loosen credit standards to businesses than to tighten them.)

The degree of net tightening for business credit, at 8 percent in the third quarter versus 21 percent in the second, was the lowest since banks began toughening their terms two years ago when the financial crisis broke, and marked the third quarter in a row when tightening has become less pronounced.

Even so, analysts said the survey did not signal the credit cycle had turned -- a key factor for the ECB in deciding when to start tightening its generous liquidity supply and record low interest rates.

"The results ... are going in the right direction but they don't signal an all-clear," said Commerzbank economist Michael Schubert.

Some euro zone politicians have accused banks of failing to provide sufficient credit, especially to small businesses, after receiving billions in extra central bank liquidity.

ECB data on Tuesday showed loans to euro zone households and firms fell on an annual basis in September for the first time ever, although a small pick-up in loans on a monthly basis gave some hope that credit is starting to flow again.

Wednesday's figures show a net 52 percent of banks said demand for corporate loans for investments had weakened in the third quarter. "There is still reluctance (by firms) to invest," said Lloyds TSB economist Kenneth Broux. "We are not returning to strong growth as deleveraging unwinds through the economy."

WEAK DEMAND OR TIGHT SUPPLY?

The survey also showed banks kept tightening credit standards for households in the third quarter, and expected that to continue in the last three months of the year, but to a lesser degree. They expect demand for mortgage loans to go up in the fourth quarter.

The ECB has consistently said there is no sign of a general credit crunch.

"The most important driving forces for the net tightening in the euro area continued to be expectations regarding general economic activity and the industry or firm-specific outlook," it said in the bank survey, adding government support has helped banks to get easier access to wholesale financing.

The survey suggests "that the current weakness in euro area loan growth may be more to do with weak demand than tight supply," Credit Suisse said in a note to investors.

"If that's the case, then bank lending may prove to be far less of a brake on recovery than many expect."