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UPDATE 2-Bank loan standards ease, loan demand up -Fed survey

* Quarterly Fed survey shows stronger demand for property, auto loans

* Some banks report easier standards for business lending

* Greater competition between banks cited in business lending

WASHINGTON, Oct 31 (Reuters) - The U.S. Federal Reserve said on Wednesday that some banks kept easing standards for lending to businesses and consumers in the last three months, while a number reported better borrower appetite for real estate and auto loans.

``Significant fractions of banks reported a strengthening of demand for commercial real estate loans, residential mortgages, and auto loans, on balance,'' the Fed said in its October survey of senior loan officers. ``Demand for most other types of loans was about unchanged.''

The U.S. central bank has cut interest rates almost to zero and last month announced a third round of quantitative easing in which it would buy $40 billion a month in mortgages to further drive down borrowing costs and combat unemployment.

Analysts said the numbers looked consistent with other data signaling an improvement in consumption and the housing market.

``A net 44 percent of banks reported stronger demand for commercial real estate loans...which is the strongest quarterly figure of the recovery to date and one of the strongest on record back to 1995,'' JPMorgan analysts wrote in a client note.

However, they were more guarded about the survey's indication of an improved climate for business spending, which has not been reflected in recent data showing lower business investment in the third quarter, when the economy's 2.0 percent annual GDP growth pace was driven by household consumption.

However, the Fed said easier lending standards for commercial and industrial loans were more widespread than in the July survey, and the biggest reason given was increased competition for business.

``Of the respondents that reported having eased either standards or terms over the past three months, almost all cited more aggressive competition from other banks or nonbank lenders as an important reason for doing so,'' the Fed said.

U.S. officials have been frustrated by the slow pace of the economic recovery. While growth accelerated to a 2 percent annual rate in the third quarter, that did not significantly lower unemployment levels that were 7.8 percent in September.

Some analysts say scarcity of credit, particularly for small companies wanting to expand, can explain the tepid recovery. Others blame a lack of demand and credit-worthy borrowers.

``The lack of pick-up in demand for commercial and industrial loans is a reflection of a reluctance to hire amid heightened business uncertainty,'' said Nomura economist Ellen Zentner.

The quarterly poll of 68 domestic U.S. banks and 23 branches and affiliates of foreign firms, also examined lending to European banks and found that loan standards for these entities had continued to tighten.

A prolonged European sovereign debt crisis has increased concerns about the credit quality of European lenders as the result of steep losses on government bonds issued by some euro-zone members, including Greece, Ireland, Portugal, Spain and Italy.

U.S. banks, fearing contagion, have taken extra care to control their exposure to European loan counterparties as a result, although the Fed said the trend might be softening.

``The fractions of respondents indicating that they had tightened standards declined significantly between the July and October surveys, on net,'' the Fed said.

Also, a small majority of the domestic U.S. banks who vie directly with foreign rivals for customers said they had seen less competition from this source over the last three months, and some said that this had helped them boost their business.