UPDATE 3-Monte Paschi loses $293 mln on derivative trade-source

* Loss on derivative deal at least 220 mln euros-source

* Newspaper says loss could be as much as 740 mln euros

* Shares fall 5 percent

(adds Monte dei Paschi, KPMG statements)

MILAN/ROME, Jan 22 (Reuters) - Banca Monte dei Paschi di Siena, Italy's third biggest lender, will book a loss of at least 220 million euros ($293 million) from a three-year-old derivative deal in its 2012 results, a source close to the matter said on Tuesday.

The loss is the latest setback for Monte dei Paschi, which requested 3.9 billion euros in state aid to plug a capital hole stemming from its government bond portfolio and hedging bets gone wrong.

The 220-million-euro loss is linked to a 2009 derivative deal with Japanese bank Nomura, the source said, confirming a report in Italian daily Il Fatto Quotidiano.

The newspaper said the existence of the trade, which was given the name "Alexandria," was only discovered by Monte dei Paschi's new management last October.

It said accountancy firm Pricewaterhouse and financial advisor Eidos were now making checks to establish the size of the loss linked to the contract, quoting an anonymous source as saying it could amount to 740 million euros.

Monte dei Paschi was already on track to end 2012 deeply in the red, having reported a 1.66 billion euro loss in the first nine months of last year.

Its shares fell 5.4 percent on Tuesday to 0.2783 euros.

"This latest news was unexpected and it's prompting significant selling orders on the stock," said a Milan trader.

The Tuscan lender, the world's oldest bank, said in a statement the derivative contract was one of several structured transactions it was reviewing. A 2008 derivative trade with Deutsche Bank is also thought to be under scrutiny.

Deutsche Bank said last week that trade, known as Santorini, had been subject to its rigorous internal approval procedure.

Back in November, Monte dei Paschi raised its request for state aid by 500 million euros to 3.9 billion euros, citing a possible hit from past transactions as it sought to hedge its exposure to Italian sovereign debt.

The review of those deals is due to be submitted to Monte dei Paschi's board by mid-February and the bank will provide a timely indication about any impact on its accounts, it said.

"ACTED FAIRLY"

Nomura said the Alexandria derivative contract was "fully reviewed and approved prior to execution at the highest level within MPS", including by the Italian bank's board, its then chairman Giuseppe Mussari and auditing firm KPMG. Mussari currently heads the Italian Banking Association.

"Nomura acted fairly and responsibly with the client at all times, and strongly refutes any suggestion to the contrary," the Japanese bank said in its statement.

However Monte dei Paschi denied that its board had examined the deal and KPMG said it was never made aware of the trade.

A second source close to the situation said the deal with Nomura in 2009 was made to restructure a position in distressed structured credit assets.

Under the asset swap deal, in which typically fixed and floating rate investments are exchanged, Monte dei Paschi changed its underlying exposure from structured credit assets to investment-grade government bonds, which seemed at the time a less risky profile, the source said.

In a report on Monday, Societe Generale said that of Monte dei Paschi's 24-billion-euro Italian government bond portfolio, 18 billion euros had been "swapped" thanks to 2009 deals. Those transactions wrongly bet on a rise in Euribor interest rates, which instead fell, triggering a loss for Monte dei Paschi.

Il Fatto Quotidiano said the transaction with Nomura included two 30-year repo deals. It said Siena prosecutors already investigating Monte dei Paschi over its pricey acquisition in 2007 of small lender Antonveneta were looking into the trade to see whether any crimes had been committed.

"Nomura was one of a number of banks approached to de-risk the positions held by MPS that they had previously purchased from (German bank) Dresdner," Nomura said.

"Nomura won the mandate based upon the competitive pricing of its restructuring proposal."

Monte dei Paschi had to request state aid last June as it was one of only four European lenders that failed to meet tougher capital requirements set by the European Banking Authority.

Its 3.3-billion-euro capital shortfall was due not only to its huge exposure to Italian government bonds, whose prices fell sharply during the euro zone debt crisis, but also to the losses on derivative contracts linked to those bond holdings.

($1=0.7510 euros)

(Additional reporting by Stephen Jewkes; Editing by Paola Arosio, Mark Potter and Sophie Walker)