MILAN (Reuters) - Investors took up 83 percent of a 700 million euro (624.05 million pounds) new share sale by Italy's Credito Valtellinese (>> Banca Piccolo Credito Valtellinese SpA), helping the mid-sized lender's efforts to shed bad debts and restructure.

In launching the cash call on Feb. 19, Creval sought to raise eight times its market value ahead of a general election that was widely expected to deliver - as it did - a hung parliament.

But Italy's recovering economy and the prospect of higher interest rates as the European Central Bank slowly tightens its monetary policy encouraged investors to buy cheaply-priced Italian banking shares.

"We're satisfied," the bank's Chairman Miro Fiordi told Reuters by phone. "The capital raising is progressing according to plan."

Creval has in place accords with investors ready to take on unsold shares for 55 million euros, bringing the total gathered to 636.6 million euros, or 91 percent of the target.

Similar accords in December allowed rival Carige (>> Banca Carige SpA) to pull off a 544 million euro capital increase despite a 66 percent take up by shareholders.

A source close to the consortium of 11 banks that are backstopping Creval's cash call said that, based on feedback from meetings with some 130 investors, they expected rights to buy new shares left unsubscribed and being offered from March 13 would be bought.

"Investors are betting on an improvement in lenders' profits in two years' time, once the balance sheet clean-up is completed and on the backdrop of rising interest rates and an ongoing economic expansion," said Pietropaolo Rinaldi, a fund manager at Anthilia Capital Partners in Milan.

"One must bear in mind that banks in general are still cheaper than other sectors, and Italian banks trade at a discount to European peers."

Under pressure, like other Italian banks, to shed soured debts that account for more than one fifth of its total loans, Creval will use the money to book writedowns and ease disposals.

The bank also says the clean-up will prepare it for a merger which it sees as "inevitable" as Italy's fragmented banking industry strives to shore up profits in the face of rising investments in technology and ever tighter regulation.

As in Carige's case, Creval's stock offering is likely to have reduced the presence among its shareholders of small savers, who traditionally owned shares and debt of regional banks in Italy.

Shareholders who did not buy into the bank's second cash call in four years stood to lose 99 percent of their investment.

($1 = 0.8123 euros)

(Editing by Mark Potter)

By Valentina Za and Andrea Mandala