MILAN (Reuters) - Veteran Italian banker and former industry minister Corrado Passera withdrew his rescue plan for Banca Monte dei Paschi di Siena (>> Banca Monte dei Paschi di Siena SpA) on Tuesday, accusing the bank of obstruction and ignoring the interests of its own shareholders.

Passera's withdrawal leaves Monte dei Paschi, the country's weakest major lender, tied to a plan drawn up and backed by investment bank JP Morgan to sell some 28 billion euros (£25.18 billion) in bad loans and raise 5 billion euros (£4.50 billion) in new capital.

"Ours was a serious proposal to turn around and relaunch the bank that would have given a key role to current shareholders," Passera said in a letter to the bank which was released to media.

"We were denied the minimum conditions for proceeding."

Monte dei Paschi said in a statement it regretted Passera's decision but added the claims he made were groundless and incompatible with the bank's duty to guarantee all investors a level playing field as regards data access.

Banking analysts say the 544-year-old Tuscan bank, the world's oldest lender, faces an uphill struggle to convince investors to back its third recapitalisation in as many years, especially at a time of political uncertainty.

Monte dei Paschi wants to complete the 5 billion-euro cash call by the end of December, an ambitious target given that Italians are to vote on Dec. 4 in a constitutional referendum which could unseat the government and sour market sentiment.

The attempted turnaround of Monte dei Paschi is the first big test of a state-backed campaign to steady Italy's banking sector and clean up 360 billion euros in problem loans.

Monte dei Paschi, which fared the worst in European stress tests earlier this year, needs to strengthen its balance sheet by year-end to meet a request by the European Central Bank and avoid the risk of being wound down.

INVESTORS FOUND

Passera said in his letter that he had assembled investors willing to invest around 2 billion euros in the bank. He did not name the investors, saying he had been prepared to identify them if Monte dei Paschi signed a confidentiality pact.

But a spokesman for Passera said the bank had asked for so many restrictions to be included in the pact they had not got round to signing it.

Monte dei Paschi had also failed so far to send him information that should have been available to all potential investors, Passera added.

The Tuscan bank said Passera's proposal was non-binding, had been put together for investors who had not been named and was not yet "solidified".

Passera, a former industry minister and one-time head of Intesa Sanpaolo (>> Intesa Sanpaolo SpA), devised his capital-boosting plan as an alternative to the JP Morgan one, which was presented last week by Monte dei Paschi's new CEO, Marco Morelli.

Passera's plan revolved around anchor investors and a separate rights issue.

Monte dei Paschi's volatile shares were up 0.4 percent on Tuesday but the bank has a market value of only around 715 million euros.

On Tuesday Corriere della Sera said the Italian government had examined a contingency plan in case the bank failed to raise the 5 billion euros in capital.

The government is considering a state guarantee for the cash call and a compulsory conversion of bonds into shares by institutional investors, the paper said. Any such scheme would need the approval of the European Union.

(Additional reporting by Stefano Bernabei; Editing by Keith Weir and Alexandra Hudson)

By Maria Pia Quaglia and Stephen Jewkes