The default rate on commercial mortgages held by U.S. banks may rise to the highest in 17 years in the fourth quarter as debt for refinancing remains scarce and the recession drags down rents.

The rate is likely to reach 4.1% by year-end, Real Estate Econometrics, a New York-based property research firm, said in a report today.

'The dramatic decline in real economic activity and labor markets since last September has undercut property fundamentals,' wrote Sam Chandan, chief economist of Real Estate Econometrics. The decline puts an increasing number of loans 'at risk,' he said.