Two sources told Reuters late on Thursday the troubled lender was considering an increase in its planned share issue to around 3.5 billion euros (2.65 billion pounds), one billion euros more than initially planned. The increase is being considered at the behest of the European Central Bank (ECB), these people said.

Monte dei Paschi had approved a capital increase of up to 2.5 billion euros in November to plug a shortfall unearthed by the ECB after a health check of euro zone banks. A person close to the bank said that amount was still the target.

Yet several bankers in the consortium of investment banks that have signed a preliminary agreement to underwrite the capital increase told Reuters the ECB was asking for a bigger hike in order to bolster Monte dei Paschi's financial strength.

The rights issue has to be carried out by the end of July. The ECB is expected to approve Monte dei Paschi's final capital plan on Feb. 4. The ECB declined to comment.

Monte dei Paschi's shares fell 5.6 percent by 1123 GMT, with traders citing the Reuters report that the bank was considering a higher capital increase.

The stock has shed more than 10 percent over the past two days. Brokers said the end of a ban on shortselling of Monte dei Paschi's shares this week was also feeding into the sell-off.

"The great uncertainty about the size, structure and timing of the capital increase will keep the stock under pressure," brokerage ICBPI said in a note on Friday.

The world's oldest bank still in business, which carried out a 5 billion euro share sale as recently as last June, emerged as the weakest lender in the ECB review of 130 banks.

Monte dei Paschi has a stock market value of just 2.2 billion euros and a price to book value of 0.2.

"If a bank knows it needs more capital, it presses ahead straight away. They haven't done that, and that's a concern for me," said Roberto Lottici, fund manager at Ifigest.

A ban imposed on the short selling of Monte Paschi shares imposed by market regulator Consob was lifted on Wednesday.

"We've got hedge funds out there speculating again on the stock in the light of the capital doubts," a Milan trader said.

(Editing by Keith Weir)

By Stephen Jewkes