The banks of German tire maker and auto parts group Continental AG (CONG.DE) oppose a deal that would see Continental taking over its peer Schaeffler, a source close to the matter told Reuters on Wednesday.

Such a move would lead to a significant increase in debt and therefore higher risks for Continental's banks, the source said.

Schaeffler said last week it was mulling a plan that could see it merge with Continental as the junior partner, in a reversal of last year's daring bid to swallow its bigger rival.

Last July, the German ball-bearing maker launched a hostile $18 billion bid for Continental, but ended up collecting more shares than it could afford, lumbering it with a crushing debt millstone as car sales collapsed.

Abandoning the plan would be a humiliating climbdown for ball-bearings baroness Marie-Elisabeth Schaeffler and would mirror a turning of the tables in Porsche's (PSHG_p.DE) bid for Volkswagen (VOWG.DE), which also backfired in the financial crisis.

The Financial Times Deutschland also reported on Wednesday that Continental's banks were opposing the deal and said the banks were planning to set up a steering committee to represent their interests.

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