SEOUL, SOUTH KOREA, March 13 (Reuters) - South Korean banks may see their capital decline by a combined 42 trillion won (S$42 billion) by the end of 2010 due to the economic downturn, making more public fund injections necessary, Fitch Ratings said on Friday.

The ratings agency's stress test on South Korean lenders showed their combined equity-to-asset ratio would likely fall to 4.0 percent from 6.4 percent as of the end of June 2008. That would translate into a 42 trillion won decline in their capitals.

Under the scenario, domestic banks would require additional capital raisings from the government, it said in a report.

'In this light, the government's current 20-trillion-won BRF (bank recapitalisation fund) may not be sufficient, particularly to the extent that it is used to buy subordinated debt and lower quality hybrid debt from the banks rather than better quality core capital.'

Fourteen South Korean banks, including sector-leader Kookmin, Shinhan and Woori , have already applied for a combined 12.3 trillion won in new capital from the fund the government is set to launch this month.

The government-orchestrated fund is aimed at helping banks increase lending to cash-strapped companies as the country is heading towards its first recession in over a decade.

The Financial Services Commission said in a response to the Fitch report that the stress test was based on the assumption that South Korean banks would not raise additional capital, while their financial standings remained solid.

'South Korean banks, unlike rivals in major developed countries, have enough room to replenish capital on their own through issues of common stocks, hybrid securities and subordinated debt,' the FSC said in a statement.

The financial watch dog added the government was planning to take bold and pre-emptive measures to support banks in case economic conditions deteriorate further.

(Reporting by Kim Yeon-hee; Editing by Ken Wills)