KfW is financing a 32-million-euro ($34.6-million) programme to develop biomass facilities in Serbia.
Biomass derives from organic material such as trees, plants and urban waste, and can be used for heating, electricity generation and the production of transport fuels.
Defenders of biomass energy production say it emits much less carbon than fossil fuels.
But it is criticised by environmental groups over concerns about its impact on forests and on biodiversity.
"We are calling on KfW to suspend the project and all finance for wood biomass energy in Serbia," 41 groups hailing from Serbia and across Europe said in an open letter.
The letter went on to say the "planned investment threatens Serbia's forests ... and exacerbates the existing high levels of air pollution".
The groups urged KfW to redirect support for Serbia towards "energy efficiency and conservation measures as well as wind, solar and geothermal energy, which protect nature and public health".
Four combined heat and power plants were constructed in four Serbian municipalities under the programme that started in 2017.
In May, KfW approved two new contracts for six more wood biomass plants for a further 9.9 million euros in loans.
The open letter comes on the heels of a new deal signed by Serbia and the European Union earlier this month to develop the supply of lithium in the Balkan country.
KfW representatives were also present during the signing of the deal in Belgrade.
The agreement was inked just days after a court decision saw the Serbian government reapprove a controversial lithium mining project in the west of the country that had been on hold for two years following mass protests.
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