By Pamela BarbagliaLONDON (Reuters) - Banca Monte dei Paschi di Siena, the oldest surviving bank in the world, is working on a rights issue to fill at least half of a 2.1 billion euro ($2.6 billion) capital gap uncovered by a European review of banks, a source with direct knowledge of the matter said.
Italy's third-largest bank has hired UBS and Citigroup to assess strategic options after it failed European Central Bank (ECB) check tests designed to test the solidity of the financial system.
The options for the historic Tuscan lender, which raised 5 billion euros as recently as June to strengthen its balance sheet and help pay back state aid, are expected to include further asset sales and a merger.
The source told Reuters the plan, which has to be presented to the ECB by Nov. 10, would include a "substantial" capital increase of at least 1 billion euros but did not give a precise figure because no decision had yet been taken.
Banks that had underwritten June's capital increase remained interested in backing the new cash call, the source said, adding the advisors were also sounding out potential new investors.
The plan also includes an "M&A event" which was more difficult and there were various options on the table, the source, adding talks with UBI Banca and other merger candidates were under way.
Combining Monte Paschi with a top Italian bank such as Intesa Sanpaolo might lead to heavy job cuts which is why a regional bank is seen as a preferred option, he added.
Monte Paschi was not immediately available to comment on Sunday.
Chairman Alessandro Profumo told Reuters on Tuesday week the lender could ultimately become part of a larger entity though he said there had been no talks with any potential buyers. He also said the bank might seek to delay repaying hundreds of millions of euros in state aid to help shore up its balance sheet.
Monte dei Paschi shares have dropped some 40 percent since the result of the ECB stress tests were announced one week ago, meaning the bank is currently worth less than half its value in early June when it raised 5 billion euros in new capital.
($1 = 0.7985 euro)
(Writing by Danilo Masoni; Editing by Silvia Aloisi and Stephen Powell)
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