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(Repeats Monday story without changes)
* Govt to seek approval to borrow 20 bln euros for banks
* Must raise 5 bln euros in capital, sell bad loans thisyear
* Government ready to step in if plan falls through
* Atlante agrees to go ahead with investment
* Go
By Valentina Za and Stephen Jewkes
MILAN, Dec 19 (Reuters) - The Italian government decided onMonday to seek parliamentary approval to borrow 20 billion eurosto underwrite the stability of its wobbly banking sector,starting with a likely bail-out of No. 3 lender, Monte deiPaschi di Siena, as early as this week.
Monte dei Paschi, recently judged the weakest of theEuropean Union's major banks, needs to dispose of a mountain ofbad loans and raise 5 billion euros in capital by the end ofthis month or else face the risk of being wound down by theEuropean Central Bank.
Italy's Economy minister said on Monday the money it wasseeking could be used to guarantee adequate liquidity in thebanking system.
"These resources could also be used as part of a programmeto boost capital at banks," he said in a press conference.
A government bailout could come as early as this week, ifMonte dei Paschi fails to pull off its own privately fundedrescue plan.
But it could prove to be politically explosive for theweek-old administration of Prime Minister Paolo Gentiloni, giventhat investors are required to bear losses under EU bailoutrules.
Earlier on Monday, however, the bank received some rare goodnews in relation to its faltering rescue plan. A key investorthat was reconsidering its commitment to the plan issued astatement saying that its concerns had been resolved.
"(Quaestio)... has agreed to approve the Term Sheet for thesenior bridge loan as agreed with the financing banks," theinvestor, private bank rescue fund Atlante, said.
Atlante has committed to spending 1.5 billion euros to buysome of Monte dei Paschi's bad loans, despite having expressed"deep reservations" in a Dec. 17 letter over the terms of abridge loan that Monte dei Paschi had secured as part of thesale of bad loans.
Even with Atlante's commitment to participate in the privaterescue bid, Monte dei Paschi is still not assured to raiseenough money to avoid the need of a state bailout.
Its 5 billion euros cash call is meant to conclude onThursday, but is not underwritten by a consortium of investmentbanks.
Monte dei Paschi shares closed before both Atlante'sstatement and the government's announcement, having lost 11percent and wiped out a week's gains.
Under a state bailout, the government would inject capitalinto Monte dei Paschi only after the forced conversion of 4.1billion euros worth of subordinated bonds into shares, a sourcesaid on Friday.
As part of its own rescue plan, Monte dei Paschi has takenout a 4.7 billion euro bridge loan with JPMorgan,Mediobanca, Credit Suisse and HSBC,said another source, familiar with the loan.
JPMorgan and Mediobanca have been working on the bank'srescue plan and have already come under fire from oppositionpoliticians who object to them earning fees in the event of astate bailout, especially fees accruing on the bridge loan.
Monte dei Paschi needs the loan to help complete the sale of28 billion euros of gross bad debts, which are to be repackagedas debt securities worth 9 billion euros.
The loan is worth around half of that, but it is securedagainst all the securities -- which was the source of concernfor Atlante, said a source familiar with the matter.
Atlante, whose shareholders include Italy's top banks andinsurers as well as state-owned entities, is due to buy a 1.5billion euro tranche of the securities.
It could see its notes claimed by the four banks if thebridge loan is not repaid. ($1 = 0.9579 euros) (Additional reporting by Paola Arosio and Crispian Balmer;Editing by Mark Bendeich/Keith Weir/Anna Willard)
