Bad loans at Italy banks rise in November - report

* Bad loans up 38 pct y/y in Nov to 104.4 bln eur

* Deposits from non-resident down 5.5 pct y/y in Nov

* Lending to households and firms down 0.9 pct m/m in Dec

MILAN, Jan 18 (Reuters) - Lending to Italian households and companies stalled at the end of last year as domestic banks wrestled with rising bad loans and shrinking deposits, a report by Italian banking association ABI showed on Wednesday.

The monthly report showed a rise in the cost of credit in the country. The weighted average rate on lending to households and non-financial companies edged up slightly to 4.25 percent in December, well above a year-ago level of 3.62 percent.

Gross non-performing loans rose by 1.6 billion euros ($2.04 billion) in November from October to 104.4 billion. The figure marks a near 38 percent annual increase.

Bad loans have been rising steadily over the past two years, and with the Italian economy expected to shrink significantly this year on the back of drastic austerity measures the picture is unlikely to improve.

The ABI report confirmed an annual fall in deposits at Italian banks already highlighted by European Central Bank and Bank of Italy's data.

ABI said deposits declined on an annual basis for a second month running. They fell 2.1 percent year-on-year in December to 1,358 billion euros -- despite an increase from the previous month.

In particular, ABI said that deposits from clients outside of Italy fell in November for the fifth month in a row. At around 419 billion euros, deposits from non-residents showed a 5.5 percent annual decline.

The euro zone sovereign debt crisis has impaired the Italian banks' ability to raise funding abroad. ABI said that net funding from abroad -- the difference between deposits from non-resident and lending to them -- had decreased by nearly a fifth in November from a year earlier.

Shut out of wholesale funding markets and increasingly reliant on European Central Bank funding, Italian banks are however able to tap their retail clients to sell bonds.

ABI said that bonds issued by Italian lenders rose 7.8 percent annually in December.

Lending to domestic households and non-financial companies stood at 1,520 billion euros in December, down slightly from the previous month. The annual growth rate slowed to 4.1 percent last month from 4.9 percent in November. ($1 = 0.7851 euros) (Reporting by Valentina Za; Editing by Jon Loades-Carter)