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After slogging through quarters of losses from disastrous bets on the Arizona and Florida housing markets, Milwaukee-based Marshall & Ilsley Corp. (MI) is facing a new source of pain: bad loans to other banks.

The bank said Tuesday it expects to post a larger third-quarter loss than analysts had expected, in part because it will set aside $185 million for loans to other banks that have abruptly gone bad.

In fact, the bank said 75% of the now-troubled loans to other lenders were current just seven days ago on Sept. 30.

M&I did not disclose which banks defaulted, but the bank did say the loan troubles occurred after "a series of recent events," including regulators taking actions against some of the banks. M&I also said that some banks couldn't raise capital as anticipated and saw some of their own loans deteriorate.

Marshall & Ilsley isn't the first regional lender to face losses from a loan to another bank. In May, Pinnacle Financial Partners Inc. (PNFP) said it would post a second-quarter loss of $21.5 million after a bank regulator at the U.S. Treasury seized a subsidiary of a borrower to which Pinnacle had written a loan.

Shares in M&I were recently down 4.2% to $7.61.

The Wisconsin bank's disclosure is a setback of sorts for the struggling regional lender, which has $60 billion in assets and 400 branches. M&I has been posting losses aggressively for quarters to get past billions in boom-era loans tied to the Arizona and Florida housing markets.

The bank said Tuesday that losses from those portfolios - by far the bank's biggest source of trouble - will peak in the first or second quarter next year.

The bank did have some positive news. It said its levels of bad loans fell in the third quarter for the first time on a sequential basis in four years, a possible sign that the credit woes affecting banks may have peaked.

The company also said it expects nonperforming loans - or loans that may soon become uncollectible - to fall $170 million from the second quarter, or 4.9% of total loans. M&I also sees early-stage delinquencies down $220 million, or 20%, sequentially - the lowest level in six quarters.

The company reiterated a previous forecast that it will set aside $390 million to $400 million in the third quarter for current and future loan losses, excluding the $185 million charge it will take for the soured loans to other banks.

But M&I executives also said they expect troubles with the U.S. economy to continue for some time.

M&I President and Chief Executive Mark Furlong said in a statement: "There simply are an inadequate number of consistent trends to reinforce the sentiments that the economy is stabilizing and better times are within sight."

-By Marshall Eckblad, Dow Jones Newswires; 212-416-2156; kevin.kingsbury@dowjones.com

(Kevin Kingsbury contributed to this article.)