Economic woes, particularly in the euro zone, have hurt dealmaking and dragged worldwide investment banking income down 7 percent to $69.4 billion so far this year, data from Thomson Reuters and Freeman Consulting showed.

In Europe, fees were at a 10-year low as volatile markets forced many companies to put off plans to list or make acquisitions, and the prolonged slowdown is pushing even top advisers to restructure teams and cut back.

Some are even contemplating more drastic options.

"The key question is not only about one specific team, but banks are really wondering which investment banking activities they should keep or if they should continue to have investment banking at all," said Christopher Kummer, from the Institute of Mergers, Acquisitions and Alliances, a think tank.

Weaker revenue in other areas, such as stock and bond trading, is also putting pressure on banks to pick and choose which divisions they should stick with as tougher regulations on capital make it harder to offer everything.

Some banks, such as British group Royal Bank of Scotland (RBS.L), have already chosen to practically abandon equities trading, while Swiss lender UBS (UBSN.VX) is ditching the bulk of its bond trading business.

Pure advisory units, which earn fees from devising deal strategies rather than commissions from trades, have so far been spared the worst cuts, as they do not use much capital.

But they are still costly to run, especially as bankers in areas such as mergers and acquisitions, who often hold down relationships with clients, have traditionally commanded some of the biggest pay packages.

CUTTING AND CHANGING

That is likely to change this year as bonuses fall. M&A fees - though still the biggest contributor to the total investment banking fee pot - have tumbled 16 percent so far this year.

Fees from equity capital markets, meanwhile, suffered the biggest drop - 18 percent - from an already weak 2011, as initial public offerings faltered.

As a result, banks are starting to reshape their corporate finance teams to make them more profitable by cutting out bankers who focus on clients in certain industries or countries, reversing efforts over the past decade to build up teams providing very specialized advice.

Many are grouping these sector teams together, or getting junior bankers to multi-task instead of specializing - a move that will likely continue in 2013 when dealmaking is not expected to pick up in a big way.

"We are trying to make some efficiency gains and it is hard," said a senior capital markets banker in London, who requested anonymity.

"You have somebody who covers banks in Germany because they are a German national and a German speaker and you would love for that person to cover French, Italian and Spanish banks."

The banker said those coverage issues were particularly tough to deal with in Europe, because of the sheer number of countries that banks try to service. But U.S. banks such as Citigroup (C.N) have also been overhauling their so-called "coverage models".

BRIGHT SPOT IN BONDS

U.S. banks dominated global investment banking fee rankings in 2012, the data showed, with JPMorgan (JPM.N) retaining the top spot. In Europe, Deutsche Bank (DBKGn.DE) captured the most fees, while Goldman Sachs (GS.N) inched ahead of UBS in Asia as the top fee earner.

One bright spot for firms was a big rise in debt capital market (DCM) fees, up 28 percent as companies rushed to issue bonds in the second half when fears over euro zone debt levels calmed down.

Bankers said bond deals would be an important source of fees in 2013 as companies struggle to obtain loans, which also take up a lot more bank capital.

Societe Generale forecast in a recent report that activity levels in DCM would drop back a little, however, and said high volatility in the past four years, since the 2008 financial crisis, made it difficult to bet on trends continuing.

"Looking back and moving forward: that is usually quite a dangerous thing to do in a car, and not advisable in capital markets either," it said.

(Editing by Dan Lalor)

• A Permanent Economic Emergency