Making use of the rules, which allow state aid in special circumstances, would impose a loss on bank shareholders and holders of their junior debt, something Rome wants to avoid.

Italian lenders are weighed down with 186 billion euros (132 billion pounds) worth of bad loans at a time when the economy is showing tentative signs of recovery after a three-year recession that was aggravated by a credit crunch.

One proposal Italy is considering in a bid to promote lending is streamlining lengthy procedures that make it very hard for banks to seize assets given as a guarantee against defaulted loans.

The government is also mulling reducing the period over which banks are allowed to book loan losses against their tax burden to one year from the current five, sources said, although this would hit public finances and so is not considered likely.

Government officials said in February they hoped to unveil within weeks a newly-created company that would issue bonds guaranteed by the state to fund the purchase of the bad loans.

Yet three sources said the EU Commission had told Italian officials in an informal meeting last month it would consider it tantamount to a bank bailout if Italy paid for a minority stake in the bad loan vehicle or provided it with a state guarantee.

Italian officials have told Brussels the bad bank is not aimed at saving ailing lenders and that the banks would shoulder part of the cost.

One source familiar with the matter said lenders would be required to transfer the bad loans to the vehicle at a discounted price. But room for manoeuvre is "very tight", another source briefed on the matter said.

The price at which the loans would be sold is key to determining how interested banks would be in joining in.

HURDLE

The main hurdle holding back sales of problem loans in Italy is the gap between what investors are ready to pay for them and the price at which banks could sell them without booking further charges.

"The Treasury is working with the Commission to find an effective solution to the bad loan problem, in compliance with state aid rules," a Treasury spokesman said on Wednesday.

EU rules introduced in 2013 require that investors in a troubled bank bear a loss before tapping taxpayers' money.

In a 2011 financial bailout of Spanish banks, EU funds were used to create a bad bank, owned in part by the state, with 51 billion euros in risky loans accumulated during the country's real-estate collapse.

Similarly, Ireland set up in 2009 a national agency that paid 32 billion euros to purge domestic banks of 74 billion euros worth of soured loans after a property crash there.

The EU Commission has yet to take a formal stance on Italy's plans.

"The Commission takes note of the planned reform of the Italian banking sector initiated by the Italian government," a Commission spokesman said on Tuesday. "We have not received a formal notification from Italian authorities."

(Additional reporting by Giuseppe Fonte in Rome, Francesco Guarascio in Brussels, editing by Gavin Jones and Gareth Jones)

By Francesca Landini and Valentina Za