(Adds comments, details)
MILAN, Oct 24 (Reuters) - Monte dei Paschi di Siena shares will resume trading on Wednesday 10 months after they were suspended when Italy's fourth-largest bank failed to raise capital to bolster its finances.
Monte dei Paschi said on Tuesday that Italy's market watchdog had approved a prospectus for its re-listing.
The bank's stock is expected to trade below the 6.49 euro price paid by the state in August when it injected 3.85 billion euros into Monte dei Paschi, implying a large paper loss for the country's taxpayers.
Traders have said the stock may fall below the 4.28 euro level at which it was valued last month during an auction held to set the payment due to investors who bought insurance against the bank's default.
"The share price will be strongly influenced by investors' emotive reaction (to losses suffered)," Roberto Russo, CEO of broker Assiteca SIM, said. "It'll take months for the valuation to reflect mainly the bank's financial performance."
At 4.28 euros per share, Italian taxpayers would be looking at a paper loss of 1.3 billion euros.
The world's oldest bank had to turn to Rome for help in December 2016 after failing to find buyers for a 5 billion euro ($6 billion) share issue needed to keep it afloat.
Weakened by mismanagement, a derivatives scandal and bad loans, Monte dei Paschi was at the centre of Italy's banking crisis and its rescue removed the biggest threat to the country's financial system.
The potential loss is even larger for former junior bondholders, whose debt has been converted into equity due to European rules that require investors to take some losses before the state can step in.
Monte dei Paschi raised 4.47 billion euros through the debt to equity conversion which priced shares at 8.65 euros each.
The state is compensating some retail bondholders by buying up shares they received in the conversion for up to 1.5 billion euros and offering in exchange Monte dei Paschi's senior debt.
Consumer group ADUC on Tuesday urged retail shareholders who did not qualify for the swap to sell their shares.
The exchange offer, due to run from Oct. 30 to Nov. 17, will lift the Treasury's stake in the bank to 67.8 percent.
Russo calculated it will also increase the average price paid by the state to around 7 euros.
A share price of 3.5 euros would value Monte dei Paschi at 0.41 times its assets, broadly comparable to that at which rivals such as Banco BPM and BPER Banca trade.
To gain approval for the bailout, Monte dei Paschi agreed a restructuring plan with European authorities that envisages cutting 5,500 jobs and selling 26 billion euros in bad debts to reach a net profit of more than 1.2 billion euros in 2021.
Italy's stock exchange said when the shares resume trading orders without price limits will be banned and the opening price will be the reference price for the day. Price limits aim to curb volatility.
($1 = 0.8505 euros) (Reporting by Valentina Za and Stephen Jewkes, additional reporting by Gianluca Semeraro.; Editing by Alexander Smith and Jane Merriman)