NEW YORK - Marshall & Ilsley Corp, Wisconsin's largest bank, forecast a wider-than-expected quarterly loss due to charges related to loans made to other banks, but said its credit quality was improving.

The regional bank said on Tuesday it would record a charge of $185 million in the third quarter related to loans made to smaller banks, which have been hit hard by the recession.

The charge will increase M&I's third-quarter provision for loan and lease losses to a range of $575 million to $585 million, and boost net charge-offs to a range of $530 million to $540 million, the bank said.

M&I previously estimated its provisions for loan and lease losses and net charge-offs would be significantly below $468.2 million and $452.6 million, respectively.

It said it now expects a third-quarter loss of 68 cents to 70 cents a share. Analysts' average forecast is a loss of 39 cents per share, according to Thomson Reuters I/B/E/S.

It is surprising because management had given some very specific guidance in the quarter ... It is worse than my expectations, Raymond James analyst Dennis Klaeser said.

However, M&I said nonperforming loans declined by about $170 million in the third quarter from the second quarter, to slightly less than 4.9 percent of total loans. It would be the bank's first quarter-to-quarter decline since 2005.

In addition, M&I said early-stage delinquencies fell $220 million, or 20 percent, from the second quarter, to the lowest level since early 2008.

Chief Executive Mark Furlong said the bank was encouraged by the decline in nonperforming loans but added, There simply are an inadequate number of consistent trends to reinforce the sentiments that the economy is stabilizing and better times are within sight.

Klaeser said nonperforming assets were still fairly significant. Given the overhang of nonperforming assets, it is still a number of quarters before the company turns profitable, he said.

The bank is expected to report third-quarter results on Oct. 22.

M&I shares fell 11 cents to $7.83 in late-morning trading on the New York Stock Exchange. (Reporting by Juan Lagorio, editing by Maureen Bavdek and John Wallace)