* Top banks' core tier 1 ratio 7.4 pct in 2012 -stress tests
* Austrian National Bank urges banks to boost capital ratios
* Sees little direct impact from any Greek debt default
* International environment poses "formidable challenge"
(Adds comments from news conference)
By Michael Shields
VIENNA, June 21 Austrian banks are better placed to withstand renewed market turmoil than they were a year ago, the Austrian National Bank said on Tuesday, playing down the potential impact of any Greek debt default.
"Austrian banks' exposure in euro area countries subject to to higher risk is comparatively low...and has continued to decline in the past year," Executive Director Andreas Ittner said in a statement on the semi-annual report.
"The ongoing uncertainties about the international environment, however, continue to pose a formidable challenge to the domestic banking sector," the report said.
The Austrian banking sector had a combined 6 billion euros ($8.6 billion) in overall exposure to Greece, Ireland and Portugal at the end of 2010. The top six banks accounted for around 4.5 billion euros of that, much of it held on their bank books, officials said.
Ittner declined to discuss in detail the potential fallout of a Greek sovereign debt default, saying only: "The impact on Austrian banks would be limited as a first-round effect."
Philip Reading, head of the bank's financial market stability department, said the central bank did not think a default would make any Austrian lender need recapitalisation.
Market uproar could, however, boost demand for liquidity, and the central bank was in talks with banks that its internal stress tests showed could be most in need, he said.
Its latest stress tests -- which it called "largely harmonised" with European Union tests -- showed the top six banks' aggregate core tier one capital ratio would reach 7.4 percent at the end of 2012 under a stress scenario.
That excludes non-state participation capital that will not count as core tier one capital in future. It compares with a baseline scenario of 9.5 percent by the end of 2012 and 8.5 percent at the end of 2010.
The central bank had in the past used tier one ratios for its in-house stress tests, but has switched to core tier one calculations based on the stricter definition put forward by European authorities.
Ittner said talks were under way with banks about developing business models that had sufficient risk cushions but still fostered economic growth, adding it was too soon to discuss levels of extra capital that key banks may have to hold.
The central bank said Austrian banks' capital base could be strengthened further given the higher capitalisation of comparable global banking groups, and noted some banks will have to repay state capital they got during the financial crisis.
"For this reason, banks should use their higher profitability primarily to bolster their capital ratios."
Austrian banks' consolidated tier one ratio hit a low in the third quarter of 2008 but improved by 2.7 percentage points since then to 10 percent at the end of last year, it said.
Austria's top six banks are Unicredit's Bank Austria, Raiffeisen Bank International , Erste Group Bank , Oesterreichische Volksbanken OTVVp.VI, BAWAG P.S.K. and nationalised lender Hypo Group Alpe Adria.
The report did not break out individual banks' performance in stress tests. (Reporting by Michael Shields; editing by Patrick Graham) ($1 = 0.698 Euros)