* Moody's cuts Danske's long-term rating to Baa1
* Also lowers Jyske, Sydbank and 2 other Danish banks
* Cites difficult business environment, market funding (Adds details, quotes, background)
By John Acher
COPENHAGEN, May 30 (Reuters) - Moody's rating agency downgraded its ratings of Denmark's biggest financial institution, Danske Bank, and four other Danish banks on Wednesday, citing a difficult operating environment and reliance on market funding.
Moody's cut Danske Bank's long-term rating two notches, to Baa1 from A2, with a stable outlook - still within investment grade.
Moody's downgrade came the same day that Standard & Poor's lowered Danske Bank one notch to A-minus/A-2 from A/A-1.
"The operating environment in Denmark is characterized by weak economic growth, weakening real estate prices and higher levels of unemployment," Moody's Investors Service said in a statement.
Danske Bank said in a statement that it did not understand Moody's "very negative view of the Danish banking sector."
"There is broad political support for a well-functioning financial sector in Denmark, as evidenced by the various bank packages, among other things," Chief Financial Officer Henrik Ramlau-Hansen said in the statement.
He said the government had appointed a committee to designate systemically important financial institutions (SIFIs) and define special rules and considerations that would apply to them.
"If Danske Bank is treated the same on that score as the other large Nordic banks, our rating will be two notches higher," he said.
Ramlau-Hansen said Danske Bank expected declining losses in the coming years and had begun several initiatives to reduce expenses and raise income that would improve earnings significantly and further strengthen its capital base.
He said Danske has a strong liquidity base, and with a capital base of 159 billion Danish crowns ($26.52 billion) and a solvency need of 91 billion, it had a "very comfortable" capital buffer of 68 billion crowns at the end of the first quarter.
Moody's said: "The magnitude of some of today's downgrades reflects a range of concerns, including the risk that some institutions' concentrated loan books deteriorate amidst difficult domestic and European conditions, with adverse consequences on their ability to refinance maturing debt."
Moody's is in the midst of a wider review of European banking systems and has recently cut the credit ratings of banks in Italy, Spain and the Nordic region.
Moody's said Danish banks faced a difficult operating environment, weakening asset quality and low profitability.
"Danish financial institutions face sluggish domestic economic growth, weakening real estate prices and higher levels of unemployment, as well as the risk of external shocks from the ongoing euro area debt crisis," Moody's said in the statement.
The agency highlighted risks to the financial institutions from relying on markets for their funding.
"Most market funds are in the form of covered bonds which have historically been a stable funding source. But structural changes to that market have increased refinancing risk, posing a particular concern for mortgage credit institutions whose access to alternative funding is limited," it said.
Moody's said the average senior long-term ratings for Danish financial institutions was now Baa1 on an asset-weighted basis.
Moody's also lowered the credit ratings of Jyske Bank , Sydbank, Spar Nord Bank and Ringkjobing Landbobank.
It cut Jyske and Sydbank by two notches to Baa1, Spar Nord Bank by a notch to Baa3, and Ringkjobing Landbobank by one notch to Baa1.
The rating agency also lowered the ratings of three specialised Danish credit institutions.
It downgraded mortgage lender Nykredit Realkredit by three notches to Baa2, DLR Kredit by three notches to Ba1, and specialised shipping finance institution Danmarks Skibskredit by three pegs to Baa2, Moody's said. ($1 = 5.9964 Danish crowns) (Reporting by John Acher; additional reporting by Luciana Lopez in New York; Editing by Leslie Gevirtz)