Italy banks seen matching earlier ECB tender uptake

* Italy banks took nearly a quarter of total funds in Dec

* Participation seen roughly in line at new tender

* Banks concerned about stigma but urged to use facility

By Valentina Za

MILAN, Feb 23 (Reuters) - Italian banks are expected roughly to match previous demand for cheap European Central Bank funds at next week's new three-year tender after grabbing almost a quarter of the total at the first such offer.

But at least one big bank may take less, with the difference being made up by smaller institutions, banking finance sources told Reuters.

In December the ECB assigned a total of 489 billion euros at the tender, of which 116 billion euros were taken up by Italian banks. A Reuters poll showed a mid-range expectation for the ECB to allot another 492 billion euros next week.

"Overall demand (from Italian banks) should be more or less in line with December, based on a number of indications," a banking source with a good overview of the domestic situation told Reuters.

In December, Italy's top two banks Intesa Sanpaolo and UniCredit took, respectively, 12 billion and 15 billion euros.

The Feb. 29 offer may represent the last opportunity to secure these longer-term funds at 1 percent. The ECB wants the tender to be the last one as some policymakers worry banks may become too reliant on the central bank's liquidity injections.

Mediobanca Chief Executive Alberto Nagel went on the record on Wednesday to say his bank would take part to the Feb. 29 ECB tender for an amount "not far different" from the 4 billion euros taken in December.

Indications of a stable take-up of ECB loans also came from sources at three other major Italian banks who spoke to Reuters this week, on condition of not being named.

"Like last time, the Bank of Italy is encouraging participation," a source at a major bank said. "In our case (the uptake) is going to be in line with December or maybe marginally lower and that's what I generally expect from other banks."

A senior banking source cautioned that many banks waited until the very last minute to finalise their decision.

"Experience taught us things can change," the source said.

The unprecedented December cash offer has helped ease market tensions for weaker euro zone members by removing the risk of a sudden bank collapse and indirectly funding purchases of troubled government bonds by domestic banks. Italy and Spain have seen their debt costs fall sharply in recent weeks.

In a sign of stronger market confidence, Intesa Sanpaolo, one of Italy's strongest banks, sold a 1 billion euro bond this week with a five-year maturity. The bank said this month it would participate in the Feb. 29 tender, but had not yet set the amount.

Market funding is still problematic for most lenders and they are likely to use the ECB cash to complete refinancing of their maturing debt after the first tender is estimated to have helped them cover nearly half of their 2012 funding needs.

Italian Prime Minister Mario Monti has repeatedly invited domestic banks to invest more of the ECB cash in the country's 1.6 trillion euro bond market.

STIGMA

Several sources nonetheless said Italian banks were concerned about the stigma attached to taking too many funds through the ECB offer.

"Some banks are very sensitive to this kind of arguments despite what the ECB president said," one senior banking source said. ECB chief Mario Draghi this month urged banks to make use of the offer, saying there was "no stigma on using the three-year facility".

One source said a leading Italian bank was expected to significantly reduce participation to the tender compared with December.

On the other hand, several small lenders that did not manage to take advantage of a state-guarantee introduced by Italy in December to allow banks to use their own debt as collateral to borrow from the ECB are seen doing so now.

Such state-backed bonds totalled 40 billion euros at the time of first ECB tender and some 30 billion euros have been issued since then -- with 12.5 billion euros by UniCredit alone.

Bank of Italy Governor Ignazio Visco said last week domestic banks had more than 150 billion euros in additional collateral they could use to borrow from the ECB.

He said the figure would rise by as much as 90 billion euros once banks completed procedures which allow them to include their loans, following a recent widening of collateral rules by the ECB. Visco said the wider collateral pool would progressively lessen the importance of state-backed bonds.

(Additional reporting by Lisa Jucca, Gabriella Bruschi, Giulio Piovaccari. Editing by Jeremy Gaunt.)