BERLIN, GERMANY - SMALL and medium-sized firms, the backbone of the German economy, are still shielded from the global financial crisis but fear that frozen credit lines could eventually deal a crushing blow.

'The biggest concern is that banks will start issuing fewer loans,' Mr Johann Stiegler of the 'Mittelstand' federation, as the class of small and medium-sized companies (SMEs) is known, told AFP.

These firms, often mom-and-pop operations with just a few dozen employees, tend to specialise in market niches and are the motor behind the world's biggest exporter.

'Such companies often have only limited possibilities for financing,' Mr Stiegler said.

If they want to invest 'either the company takes the money from the owner's wallet or it seeks a loan,' he said.

But turmoil on the world's financial markets has made German banks skittish about extending credit.

Several institutions specialising in loans for SMEs have already been swept up in the crisis.

IKB bank faced huge losses on investments connected with the US market for high risk, or subprime, mortgages. It required massive financial support, mainly by the development bank KfW, the German government's financial arm.

And IKB had to be bailed out several times with a combination of public and private backing before it was finally sold to US investment fund Lone Star.

The KfW, meanwhile, will end the year in the red.

Mr Thomas Huene of the Federation of German Industry said that the danger of a 'credit contraction' was sparking jitters at SMEs in Germany although he acknowledged that financing had not yet become scarce.

The banking sector is also wary.

Owners of medium-sized and particularly small businesses tend to turn to savings and loans or local cooperative banks when they need a line of credit.

Those institutions have been sheltered so far from the storm.

'It has not become more difficult to give loans,' said Mr Werner Reuter, who deals with business clients at the Volksbank credit union in the southwestern city of Karlsruhe, in the Mittelstand's heartland.

He said that because his bank had no international dealings it had escaped the kind of risk exposure that had brought other institutions low.

'There is a certain insecurity' among clients, Reuter said. 'But there is no sense of panic.'

And in the machine-tool manufacturing sector, a field where Germany excels internationally, 'there has been no cry for help from the firms,' said Mr Josef Trischler, who deals with economic affairs at the sector's trade association.

But companies could begin feeling a knock-on effect if their clients are unable to get loans to buy equipment, he said.

'In certain sectors, banks are starting to think twice' before extending credit for such purchases, Mr Trischler said, adding that the cautiousness had led to a 10-percent slide in machine-tool orders in August from the previous month.

'The financial crisis could aggravate that trend,' Mr Trischler said, since foreign orders had been the most dramatically affected.