UPDATE 3-Monte Paschi faces near $1 bln loss on 'surprise' trades
* Market worried could be more surprises - analyst
Main shareholder does not exclude legal action
* No sign other banks face similar problems - Treasury minister
By Stephen Jewkes and Silvia Aloisi
MILAN, Jan 24 (Reuters) - Banca Monte dei Paschi di Siena, Italy's third biggest bank, could face losses of as much as 720 million euros ($956 million) on past trades in financial derivatives which management says it only recently discovered.
Already one of Europe's most undercapitalised banks, Monte dei Paschi had to ask for 3.9 billion euros in state aid last year to plug a capital hole stemming from its vast government bond portfolio and hedge transactions that had gone wrong.
But the world's oldest bank has now said it is reviewing three loss-making structured trades related to its Italian sovereign bond holdings which only recently came to light and were negotiated by its previous management.
"Yes. The actualised shortfall is around that amount," the bank's chief executive Fabrizio Viola was quoted by daily newspaper Il Messaggero as saying when asked if 720 million euros was a certain loss rather than simply a maximum risk.
The bank declined to comment but a source close to the matter told Reuters the loss was a preliminary estimate, adding the net figure might be different for tax considerations.
Monte Paschi's shares were down over 7 percent at 0.2353 euros by 1435 GMT on Thursday, extending this week's drop to over 20 percent and valuing the bank at around 2.8 billion euros.
The scandal, which has thrust the bank into Italy's election campaign because of its historical links to the centre-left , is the latest setback for Monte dei Paschi and analysts have urged it to come clean on any other potential surprises.
UBS said in a research note on Thursday it was including in its estimates a loss of 720 million euros on the derivative trades, pending more clarity, pushing the full-year expected loss to over 2 billion euros.
"Since the bank's statement spoke of an analysis exclusively of three products, the worry is there could be more and that's spooking the market," one analyst said, asking not to be named.
Viola, who has said the three products were never submitted to the bank's board, told Il Messaggero the management would now open every drawer in the bank for caution's sake. "But I think we're very close to completing the (clean-up) job," he said.
A spokesman for main shareholder Fondazione Monte dei Paschi di Siena told Reuters it did not exclude taking legal action depending on the outcome of analyses under way.
The bank said on Wednesday that 500 million euros requested in extra state aid in November would be enough to absorb a hit on its capital from the structured trades, which were linked to its massive 24 billion-euro Italian government bond portfolio.
"The bank is facing some tough challenges as its asset quality deteriorates and this is eroding its capital base. There is a risk of nationalisation and a chance bondholders could be asked to share the burden of a bank restructuring," a bank analyst said, asking not to be named.
The bank is holding a board meeting on Thursday to pave the way for a shareholder meeting on Friday to vote on a cash call underpinning the state bailout.
The Bank of Italy said the lender, which is already being probed over the pricey acquisition of smaller rival Antonveneta in 2007, was cooperating with regulators and judicial authorities on the structured trades.
The deals in question are the so-called "Alexandria" trade with Japanese bank Nomura, the "Santorini" trade with Deutsche Bank and a derivative called "Nota Italia".
The findings of a review on the trades are expected to be submitted to the board by mid-February.
The central bank also said the new management, headed by Chairman Alessandro Profumo, had produced documents that had previously been hidden.
Profumo, former CEO at Italy's biggest bank UniCredit , took up his new role at Monte Paschi last April in place of Giuseppe Mussari while Viola took over as CEO in February from Antonio Vigni.
Mussari stepped down as head of Italy's banking association late on Tuesday, although he has denied any wrongdoing.
"You'll have to ask them (the old management). I can only make suppositions. And I prefer to keep them to myself," Viola told Il Messaggero when asked why the Bank of Italy had not been informed.
On Thursday, Italy's Treasury minister Vittorio Grilli said there was no sign that other Italian lenders could face problems similar to those at Monte Paschi.
"It's an isolated case and I don't see any reputational risk for other Italian banks which are much more solid than foreign banks as regards their exposure to derivative," said Giovanni Fiori, professor of accounting and business at Rome's LUISS Guido Carli university.