* Banks see steady tightening of loan standards in Q3 * Say demand for credit expected to remain weak * Survey findings underscore policy dilemma for ECB By Eva Kuehnen FRANKFURT, July 25 (Reuters) - Banks expect to toughen their credit rules further in coming months with demand for loans from firms and consumers remaining weak, underscoring a dilemma facing the European Central Bank in its efforts to revitalise the euro zone's economy. Fears about the euro zone's future are making companies and other borrowers increasingly nervous about taking on credit and investing in their businesses, sapping the bloc's already weak economy. Meanwhile banks have steadily tightened lending standards over the last three years in response to the region's debt troubles and to cope with stricter capital rules. In its latest quarterly Bank Lending Survey published on Wednesday, the ECB said 11 percent of banks that took part made it harder for companies to borrow in the second quarter, while only 1 percent eased their rules. The net balance of 10 percent was up from the 9 percent in the first quarter. The survey, conducted over a two-week period straddling the June 28-29 EU summit, highlighted that even exceptional policy measures such as the 1 trillion euros of three-year money the ECB pumped into the banking system between December and February have not been able to calm credit market nerves. "Looking ahead to the third quarter, banks expect a continued decline in the net demand for loans, both for enterprises and households, even if less negative than in the second quarter," the survey said, adding that banks also expect to keep steadily tightening their lending rules. The ECB has not ruled out offering another round of low-cost loans but, with demand for credit subdued, recent comments from policymakers suggest it is not on the immediate horizon. "Demand for loans remains a problem," said HSBC's top euro zone economist, Janet Henry. "...There is little the ECB can do directly to stimulate this, as long as the euro zone sovereign crisis weighs heavily on sentiment." CRUMBS OF HOPE Survey participants said the debt crisis had a greater impact on funding conditions in the second quarter than in the first. But demand for mortgages, often seen as a forerunner of broader credit trends, saw a recent demand slump slow. A net 21 percent of banks saw a drop in demand compared with 43 percent in the first quarter. More general consumer demand for loans remained broadly unchanged with a net 27 percent of banks seeing a slowdown. A lending survey published simultaneously by the Bundesbank, showed banks in Germany did not tighten credit standards for firms in the April-July period, while the fall in demand was slower than elsewhere, dropping at a net 6 percent of banks. Germany has suffered much less than its peers from the debt crisis, while banks on the euro zone's periphery are under particular strain, facing elevated funding costs in the market as investors demand ever higher premiums. The bleak broader lending figures come the euro zone economy heads for its second recession since 2009. Business surveys showed on Tuesday that Europe's private sector looked set for a prolonged slump. The troubles are driving expectations that the ECB will cut rates from their current record low of 0.75 percent in the coming months and may resort to more unorthodox or untested policy measures. Q2 Q1 - Loans to businesses Reporting tighter credit standards this quarter 10 9 Reporting higher loan demand this quarter -25 -30 Expecting tighter credit standards next quarter 10 2 Expecting higher loan demand next quarter -8 7 - Mortgage loans to households Reporting tighter credit standards this quarter 13 17 Reporting higher loan demand this quarter -21 -43 Expecting tighter credit standards next quarter 5 7 Expecting higher loan demand next quarter -10 -12 The survey of 130 banks was conducted from June 21 to July 5.