LONDON (Reuters) - Suitors eying the debt recovery unit of Banco BPM are expected to take on bad loans for an amount close to the top of a 3.5-10 billion euro (£3-£8.8 billion) range set by the Italian bank, a source familiar with the bidding process said.

The prospect of a faster-than-expected clean-up lifted shares in Banco BPM by 5.6 percent on Tuesday, outperforming a 1 percent rise in the banking sector <.FTIT8300>.

Banco BPM has recently put on the block a last batch of 3.5 billion euros in bad debts it had earmarked for sale.

This would allow it to reach a 13 billion euro disposal target two years ahead of schedule.

Investors can offer to buy more and swallow up to a total of 10 billion euros in bad loans Banco will still hold after a 5 billion euro securitisation sale that was announced on Tuesday.

The source said offers would likely aim for amounts close to the top of the range, virtually ridding the bank of its defaulted loans. Yet Banco BPM would still hold some 9 billion euros in loans unlikely to be repaid in full.

Sources told Reuters on Monday Banco BPM's latest bad loan sale was drawing strong interest from investors eager to snap up the debt collection unit they can offer to buy with the loans.

Il Sole 24 Ore reported on Tuesday that the amount of bad loans being offloaded in the process could reach 8 to 9.5 billion euros, above analyst estimates of 7-8.5 billion euros.

With soured loans accounting for 20.5 percent of total lending at the end of March, Italy's third-largest bank has been dogged by concerns it would need fresh capital to write down bad debts and sell them off.

As part of its efforts to address bad loans, Banco BPM said on Tuesday it had sold the riskier notes in its 5 billion euro securitisation to Christofferson Robb & Company at a price of 34.3 percent of the underlying loans' nominal value.

The bank, which will tap a state guarantee scheme on the senior notes in the securitisation, said the sale would lower its gross soured loans to 16.6 percent of total lending.

(Reporting by Pamela Barbaglia, writing by Valentina Za, editing by David Evans and Adrian Croft)

By Pamela Barbaglia