ALBANY — KeyCorp posted the biggest quarterly net loss in its 183-year history — owing largely to a $1 billion charge stemming from a federal judge’s May decision saying the KeyBank parent ran a tax shelter in Germany.

The Cleveland-based holding company announced Tuesday a net loss of $1.13 billion, which marked a dramatic reversal from the $337 million net income it reported for the same period of 2007.

KeyCorp was once based in Albany, and still has several branches in the region.

While mounting bad residential construction loans also hurt KeyCorp’s balance sheets during the quarter, the company’s performance was better than the $1 billion loss implies. Without the tax-related charges, KeyCorp’s quarterly net loss was only $115 million. For the first half, the company posted a net loss of $908 million, compared to a net income of $141 million for the same period of 2007.

“We obviously [experienced] a loss, but much of the loss has to do with this court decision,” said KeyCorp spokesman William Murschel.

In May, a U.S. District Court judge in Cleveland ruled against an entity established by KeyCorp and PNC Financial Services Group in Pittsburgh. The IRS accused the banks of using a waste-to-energy facility in Wuppertal, Germany as a “tax dodge.” KeyCorp Chief Executive Officer Henry Meyer III declared Tuesday his intention to appeal that ruling.

Despite the record-setting loss, KeyCorp investors remained confident in the company. By the close of trading Tuesday, its stock price was up 4.26 percent at $11.99 per share.

KeyCorp’s legal woes have not scared off consumers. Meyer said bank deposits grew last week in the wake of the July 11 failure of IndyMac Bank. For the second quarter, KeyCorp had $49.9 billion in deposits, up 8.3 percent from a year earlier. But that year-over deposit growth received a boost from KeyCorp’s acquisition of U.S.B. Holding Co. in Orangeburg, Rockland County.

“While our professional and institutional investors have a good understanding that Key is in safe and sound condition, industry headlines have generated an environment of some indiscriminate concern in the general public. I have great confidence when I tell depositors that we are a sound financial institution with a strong balance sheet,” Myer said in a Tuesday conference call with analysts.

Bracing for the lease transaction charges, KeyCorp last month moved to shore up its financial position by raising $1.65 billion in capital and reducing its stock dividend.

The IRS claims the banks owe $88 million in taxes for the 1999 to 2003 tax years — and more for subsequent years. KeyCorp is taking a charge more than 10 times that amount because it has engaged in dozens of similar lease transactions. The company could also end up owing taxes on it if the appeal fails, Murschel said.

KeyCorp’s move to aggressively reduce its exposure to its worsening residential construction loan portfolio also deepened the quarter’s loss. The company’s provision for loan losses during the quarter rose 12-fold to $647 million from $53 million a year earlier.

Starting in 1996, KeyCorp and PNC jointly engaged in a series of sale-in/lease-out or SILO transactions, in which a company buys a property and simultaneously provides its original owner with a long-term lease. In 1999, they paid $423 million for the German facility, which burns household waste and turns it into fuel for generating electricity and steam heat.

Under SILO arrangements, the former owner can use the property without paying taxes on it and the new owner receives tax benefits. The banks claim such transactions were once common in the industry, but Congress eliminated the tax perks of SILOs in 2004 and they have mostly vanished.