Germany's second-largest lender Commerzbank will refuse loans which don't help Germany or Poland, as the euro zone crisis makes European banks more protectionist in choosing between writing new business and meeting stringent capital requirements.

We are not doing business which is not to the benefit of Germany or Poland, Chief Financial Officer Eric Strutz told analysts on a conference call discussing third-quarter earnings on Friday. We have to focus on supporting the German economy as other banks pull out.

Commerzbank, which is 25 percent owned by the State, is accelerating the pullback from euro zone nations and cutting risky assets to avoid another state bailout after a 798 million euros (686.8 million pounds) impairment on Greek assets pushed it to a third-quarter operating loss.

Having cut exposure to indebted euro zone countries by more than 20 percent to 13 billion euros, including a 52 percent haircut on Greek debt, the Frankfurt-based lender said it would continue reducing its public sector debt in Portugal, Italy, Spain, Ireland and Greece.

When resources are tight you shrink back to your strongest footprint. Other banks face similar choices, said Keefe Bruyette & Woods analyst Matthew Clark.

Banks are cutting risky assets as a way to avoid setting aside more capital to meet more stringent rules set out by the European Banking Authority.

European banks need to raise 243 billion euros to achieve a core tier one capital ratio of 9 percent using a more stringent definition of capital, analysts at J.P Morgan said in a note on October 19.

Commerzbank's move to shore up its home turf shows that even Europe's largest economy which has been relatively sheltered from the euro zone crisis, is also feeling the heat.

Commerzbank said it had a core tier one ratio of 9.4 percent at the end of September and needs to raise 2.9 billion euros to meet tougher capital requirements set out by the European bank regulators.

We can meet the required capital ratio by, for example, reducing risk assets in non-core areas, selling non-strategic assets or by means of retained earnings and we do not intend to tap new state funds, Commerzbank said.

Commerzbank will keep its Eastern European BRE Bank unit and its online arm comdirect but will review the possibility of selling financial investments in the hope of cutting risky assets by 30 billion euros, the bank said.

Its property financing unit Eurohypo will stop taking new business, the bank said.

Last month, CEO Blessing had already made clear he would rather pare back businesses than resort to German state rescue fund SoFFin a second time.

EURO ZONE STILL A WORRY

The outlook for the current year and 2012 is subdued, the company said in its report, citing the risk of escalation of the European sovereign debt crisis and stricter capital requirement for the industry.

In a conference call with analysts, finance chief Strutz was more forthright, saying efforts to resolve the euro zone crisis need to be intensified, We have now had 18 summits. The last ones were more encouraging that the first 15. But I feel we will have more summits.

The whole stability of Europe depends on whether Italy gets its act together, he said, citing a key economy seen vulnerable to contagion.

The lender's exposure to the country was 14.3 billion euros at the end of September, 7.9 billion of which in sovereign debt.

Commerzbank remains vulnerable to many existing external threats outside its direct control, Silvia Quandt analyst Michael Rohr said.

The lender was forced to abandon its profit target for next year.

We continue to be committed to our original operating profit target of 4 billion euros for the group but, on account of the market environment, we will be unable to reach this target next year, Chief Executive Martin Blessing said on Friday.

Its shares were down 4.39 percent at 1.676 euros at 1200 GMT, while the STOXX Europe 600 Bank index gained 0.39 percent.

The third-quarter operating loss of 855 million euros compared with a year-earlier profit of 116 million was worse than the 683 million euros loss estimated in a Reuters poll.

Earnings from Commerzbank's core businesses of lending to midsized German, the so-called Mittelstandsbank, generated an operating profit of 344 million euros.

Q3 results were weaker than expected, particularly performance in the core bank was disappointing, Equinet analyst Philipp Haessler said.

(Additional reporting by Christoph Steitz and Sarah Marsh; Editing by Hans-Juergen Peters and Mike Nesbit)