Demand for credit from small firms -- which have been targeted by the government as having the potential to boost the faltering UK economy -- has fallen and will fall further due to fears over the tough market environment, according to a survey.

BDRC Continental's survey on Britain's small-and-medium-sized enterprises (SMEs) showed that 74 percent of those firms did not apply for and did not need new credit, while the number of those that did had fallen to 15 percent in the third quarter from 19 percent in the first and second quarters.

BDRC director Shiona Davies said this drop in demand for credit from SMEs reflected fears over the economic slowdown, mainly caused by Europe's sovereign debt crisis, rather than problems with getting credit from the banks themselves.

Demand has fallen and is falling further. The main barrier to future borrowing is the economic climate, said Davies.

BDRC said 432,000 SMEs surveyed blamed the macroeconomic environment for not wanting to take on new credit facilities, while 100,000 cited discouragement from bankers as a reason to shy away from borrowing new money.

Britain's Conservative/Liberal Democrat coalition government has highlighted the small business sector as a key area in its fight to get growth into the struggling UK economy.

Under a government deal known as Project Merlin struck with the likes of Barclays , HSBC and part-nationalised lenders Royal Bank of Scotland and Lloyds , top banks have pledged to lend more to businesses.

Banks have countered criticism that they are not lending enough to business by saying demand is not there.

The banks are on track to lend 76 billion pounds to SMEs for the whole of 2011, according to official figures.

The Treasury has noted that the 56 billion pounds in credit made available to SMEs in the first three quarters of the year is below target and has urged the banks to do more.

(Reporting by Sudip Kar-Gupta)