"The size of the fund has been set out to be fully sufficient to cover all funding needs that may emerge from the situations now under observation", the source said.

The higher overall cost of the rescue by the state is due to the revising done by the European Central Bank of the capital shortfall of the bank to a current €8.8 million compared to an initial estimate of approximately €5 billion.

The Italian government is likely to put in about €6.5 billion to rescue the country's third-biggest lender Monte dei Paschi di Siena, more than initially expected, sources close to the matter said.

"The bank has quickly started talks with the competent authorities to understand the methodologies underlying the ECB's calculations and introduce the measures for a precautionary recapitalization", Monte dei Paschi said in its statement.

A 6.5 billion euro capital injection would give the Italian government a stake of around 70 percent in the lender.

Monte dei Paschi, the world's oldest bank and the third-largest in Italy, said its net liquidity has deteriorated rapidly in the three weeks through December 21, dropping 36% to €7.7 billion. Monte dei Paschi is drowning in €28 billion of bad loans, only managed to raise €2.5 billion.

According to the Italian economic newspaper Il Sole 24 Ore, the European Central Bank arrived at its bailout figure for Monte Paschi on Thursday. It took a harsher stance on the bank's capital shortfall so it would be on the safe side and help to restore confidence in the lender, said one source.

Precautionary recapitalization is a form of state intervention with a struggling bank that remains solvent. The scheme involves a much less drastic hit to investors in the bank than is the case under European Union rules if a bank goes into resolution, when even depositors over €100,000 can be "bailed in".


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