The European Commission told Italian lender Monte dei Paschi di Siena to beef up a restructuring plan before it can be given approval for a 4 billion euro ($5.3 billion) state bailout.
Competition Commissioner Joaquin Almunia said in a letter sent to the Italian government on July 16 the plan by the scandal-hit bank was too soft on executive pay, cost-cutting, provisioning policies and treatment of creditors.
Almunia also called for a reduction in the bank's trading activities and exposure to sovereign risk.
Monte dei Paschi, Italy's third biggest lender, received a state bailout earlier this year to plug a capital shortfall but the EU still has the right to reject the plan, opening up the possibility it might have to repay the cash.
"I am foremost concerned with the viability of the bank. In order to allow the bank to restore its viability the existing restructuring plan needs still to be improved," Almunia said in the letter, obtained by Reuters.
A spokesman for the Italian treasury said the Commission had not rejected the plan and that negotiations were continuing.
In a sign that no quick agreement is expected, he said the process would take "months, not weeks".
The EU Commission said it would not comment on leaks.
No comment was immediately available from the 500-year-old bank, which is at the centre of a judicial probe over loss-making derivatives deals carried out by its former management.