* Bank forecasts 2012 loss at 330 mln euros
* Shares dive at open, recover later (Adds details, analyst comments)
MILAN, March 5 (Reuters) - Shares in Italy's Banco Popolare rose slightly on Tuesday as the market welcomed an increase in loan loss provisions as a clean-up of its balance sheet.
Banco Popolare, Italy's fourth-largest bank by number of branches, warned late on Monday it expected a net loss for 2012 of around 330 million euros ($429 million) after it raised provisions on non-performing loans in the fourth quarter to 650 million euros.
That compared with provisions of 602 million euros in the first nine months of 2012.
Banco Popolare's shares reversed an early 5 percent loss and were up 0.16 percent at 1.225 euros by 1040 GMT, underperforming a 2.5 percent rise in the European banking index.
"If it's a one-off clean-up of their balance sheet, it can be very positive," RMJ fund manager Alessandro Frigerio said.
Banco Popolare said the increase in loan loss provisions was driven by the Bank of Italy's inspections of Italian lenders - a sign of the pressure on lenders to build adequate provisions for bad debt.
At its annual meeting with major lenders in November, the central bank discussed how a deteriorating economic situation was hurting credit quality, and it has called for higher coverage ratios of bad loans.
Traders and fund managers said Banco Popolare's move would have a negligible impact on its capital base and that other lenders were likely to follow its example. Major lenders report their 2012 full-year results from next week to the end of the month.
The bank's cash coverage ratio of bad debts - revised to 28 percent from 24 percent - still remained well below the 43 percent held by Italy's two biggest banks, Intesa Sanpaolo and UniCredit.
A prolonged and painful recession in Italy has driven problematic loans higher, reaching 125 billion euros at the end of 2012.
Banco Popolare said its 2012 net loss - more than seven times an estimated loss of 46 million euros in an analyst consensus posted on its website - was also due to a weak performance at its minority-owned consumer credit unit, Agos Ducato.
It said the unit would account for a hit of about 100 million euros to its fourth-quarter results. The bank's board is due to meet on its full-year 2012 accounts on March 15.
Problems at Agos Ducato, which is majority owned by France's Credit Agricole, were already flagged last December when the French bank took a shock 572 million euro quarterly goodwill provision for the unit.
Banco Popolare said that, despite the profit warning, its Core Tier 1 ratio - a key measure of financial strength - remained above the minimum 9 percent threshold set by the European Banking Authority. ($1 = 0.7687 euros) (Editing by Lisa Jucca and Jane Baird)