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UPDATE 1-Monte dei Paschi profit falls, raises bad loan provisions

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MILAN, May 9 (Reuters) - Monte dei Paschi di Siena on Thursday reported an 85 percent drop in first-quarter net profit, hit by shrinking revenues and bigger writedowns on problem loans due to Italy's weak economic outlook.

Monte dei Paschi was bailed out by the state in 2017 and CEO Marco Morelli is working to turn the bank around to comply with restructuring commitments agreed with European Union competition authorities and make it attractive for a potential buyer.

The bank said it had booked 37 million euros ($41.40 million) in provisions against problem loans in the quarter after cutting its estimate for Italy's 2019 economic growth as required by new, forward-looking accounting rules.

Loan-loss provisions totalled 164 million euros in the period, up from 137 million a year earlier.

"The first quarter of 2018 was a totally different macro environment," CEO Morelli told an analyst call.

The European Commission said this week the euro zone's third-largest economy would expand by just 0.1 percent this year, halving an already gloomy 0.2 percent figure and drawing accusations of prejudice from Italy's government.

Monte dei Paschi said net profit stood at 28 million euros in January-March compared with 188 million euros a year earlier.

Net interest and commission income both fell compared with a year earlier, with net fees decreasing 12 percent and the income from the bank's core lending activity down 3 percent annually.

Under the bank's 8 billion euro bailout, which handed Rome 68 percent of the world's oldest bank, Italy must submit an exit strategy to Brussels by the end of this year and bankers say turnaround efforts must bear fruit for a buyer to emerge.

The bank's core capital weakened slightly to stand at 13.3 percent of assets at the end of March, compared with 13.7 percent at the end of 2018.

Monte dei Paschi said it had booked 92 million euros in one-off charges in the first quarter, partly to settle disputes with clients over diamonds sales following a judicial probe that involves several Italian banks.

The bank said soured loans accounted for 16 percent of total lending at the end of March compared with 34 percent a year ago. ($1 = 0.8937 euros) (Reporting by Valentina Za, editing by Jane Merriman)