German banks face a critical situation because foreign banks are reluctant to lend to them after the joint rescue of small-company lender IKB, state-backed lender WestLB's chief executive said.

We sense in the markets that the readiness of foreign banks to extend credit lines to German banks has become difficult, WestLB Chief Executive Alexander Stuhlmann told journalists late on Monday in remarks embargoed until Tuesday.

The country's lenders were in a not uncritical situation overall, he added.

German banks had created the impression abroad that the whole sector was facing problems by mounting a 3.5 billion euro

($4.7 billion) rescue of IKB after it ran into problems linked to U.S. subprime mortgage investments, Stuhlmann said.

Stuhlmann's comments underscore the credit worries that continue as rising delinquencies in the U.S. subprime market spill into other markets through pools of asset-backed debt products sitting on the books of banks and hedge funds.

German Finance Minister Peer Steinbrueck said on Tuesday he thought the country's bankers had the situation under control.

IKB's troubles focused early attention on Germany's banking system, followed by state lender SachsenLB, which last week revealed subprime problems and had to be propped up by fellow banks with a 17.3 billion euro credit line.

Some analysts criticised Stuhlmann's comments.

I thought that it was irresponsible. A CEO simply does not make statements like that, said a senior bank analyst with a major European bank.

But Fox-Pitt Kelton analyst Christian Wiss said the market's reaction to such announcements may become more muted although it was still nagged by uncertainty about what tranches of debt securities banks were holding and what their losses might be.

I think we will soon get to a stage where the market's sensitivity to this kind of news is decreasing.

SachsenLB had to be bailed out but no one made a big deal about it, Wiss said.

Investors worry that big damage may not be limited to the non-listed state-sector banks. IKB is 38 percent owned by state development bank KfW.

Financial stocks made up six of the 10 biggest decliners on Frankfurt's large cap DAX index on Tuesday.

The Financial Times newspaper reported this week that Deutsche Bank had borrowed funds last week directly from the Federal Reserve via its discount window.

The paper said the move came on Friday, shortly after the Fed delivered an emergency 50-basis-point cut in the discount rate to 5.75 percent to stimulate bank lending and fend off fears of a deeper credit crunch.

Deutsche Bank declined to comment on the report.

Germany's central bank has repeatedly called for calm, saying the nation's banks' exposure to the U.S. housing market was limited and lenders were healthy enough to absorb losses.

WestLB has said it has over 1.2 billion euros in overall U.S. subprime exposure, but Stuhlmann said the Duesseldorf-based bank could cover all its risks from its own liquidity. We are not in a situation like IKB, he said. Credit rating agency Standard & Poor's analyst Stefan Best said Germany's banks have come into the spotlight because they are less profitable than their European peers and their wholesale-orientation makes them more vulnerable to a crisis of confidence.

Looking at balance sheets and exposures of rated German banks, we believe that concerns about credit quality lack substance, Best said.

Banks like IKB and SachsenLB have big liquidity lines, he said. There is no underlying credit risk which warrants this lack of confidence, but lack of confidence can create a problem for an institution.

(Additional reporting by Andrew Hurst in Zurich)

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