* Italy, Austria to help boost gas trading
* Poor liquidity set to improve, still lags
* Eni's market making role faces challenge
* Banks eye joining new exchange
By Stephen Jewkes and Oleg Vukmanovic
MILAN/LONDON, Aug 29 (Reuters) - Italy's new gas futures exchange launches next Monday aiming to jump-start one of western Europe's largest yet most inefficient energy markets and create a regional trading hub.
Europe's third-biggest gas market after Britain and Germany is emerging as southern Europe's core gas trading point as new pipelines and liquefied natural gas (LNG) projects make it one of the continent's most diversely supplied markets.
Yet despite importing 68 billion cubic metres (bcm) of gas from Russia, North Africa and the Netherlands last year, and more than 40 bcm of extra capacity flagged for coming years, a lack of transparency has crippled trading activity.
The launch of the MT GAS trading exchange aims to open Italy's gas market to more traders and boost business while Austria's gas hub may start offering Italian gas products for the first time.
"We are starting consultations with our market participants next week about physical gas delivery into the Italian market," Gottfried Steiner, head of Austria's Central European Gas Hub, told Reuters.
Yet some analysts argue that it's too little, too late, as other markets were faster to take off.
"Italy woke up three years too late to the opportunity on its doorstep. The Dutch TTF has won the race to become mainland Europe's gas hub. They (Italy) have lost the race to be No. 1 but they could be a very good No. 2," said Societe Generale senior gas analyst Thierry Bros.
Italy's gas sector was liberalised in the early 2000s but the stranglehold of state-controlled gas company Eni on upstream and wholesale sectors hobbled competition, helping keep retail gas prices high and delaying development of a liquid trading hub.
A virtual gas trading point, the PSV, was created in 2003 but a lack of liquidity, competition and pipeline bottlenecks have kept Italian spot prices at a premium to European peers.
Government measures forcing Eni to spin off pipeline capacity have, however, boosted trading and prices have finally started to track spot prices on northern European hubs.
Italian day-ahead gas prices trade above 27 euros ($36.02) per megawatt hour (MWh), a premium of two euros to the Dutch TTF exchange, mainland Europe's most liquid gas hub that links Britain's and Germany's huge markets.
Yet despite recent progress, gas trading liquidity in Italy still lags far behind other western European hubs.
Italy's gas market churn rate, which shows how many times gas is traded before it is consumed, rose to three in 2013, compared with 19 in the Netherlands and 23 in Britain. A churn rate of 10 is considered a threshold of a mature market.
Italy generates almost half its power from gas and the government is keen to find ways to lower prices to help its businesses compete better, and it hopes a competitive gas exchange will force prices lower.
Because Italy needs to burn gas to produce electricity, power prices for 2014 delivery remain above 60 euros/MWh, 1.5 times those in Germany.
The futures exchange, which will be run by energy market operator GME, will offer monthly, quarterly, half-yearly and yearly contracts.
Doubts remain over which firms will trade the new market given low liquidity in Spain and France as banks pull back from trading gas outside already established hubs in northern Europe, leaving the field to energy majors.
"Italy has been a premium market for some time and big foreign players like BP, Gas Natural, E.ON and GDF, as well as the main Italian players, already have (spot) positions,' said Paolo Ghislandi, secretary general of AIGET, Italy's association of energy traders and suppliers.
"I'm sure they'll want to play on the futures market too," he said.
There are around 150 operators trading gas on the PSV, up from around 110 in 2011 and just 82 in 2009.
Banks meanwhile are hedging their bets.
"We won't participate straight off since it's physical settlement. We need to see if the liquidity is there first and then we'll consider it," a source at a top European bank said.
Eni may become the market maker due to its size but a pool of operators might also include Enel and Edison which have large gas portfolios, industry sources said.
Enel said it was too early to comment. Eni and Edison declined to comment.
"One of the main sources (of gas) into PSV has been Eni which instead of incurring additional take-or-pay penalties has preferred to put a lot of the gas into the PSV, driving prices down towards other hubs," Wood Mackenzie analyst Massimo Di-Odoardo said.
Gas buyers from suppliers such as Russia often have a so-called take-or-pay clause that forces them to pay hefty fees if they do not buy all the gas agreed to in long-term contracts.
But doubts over the bourse's ability to stay the course and win over investors and traders remain.
"Liquidity is not about a bourse but people and players who trade," said Davide Tabarelli, head of energy Nomisma Energia.
"You can't create a bourse by decree. It's like giving skis to someone who can't ski."
$1 = 0.7496 euros Additional reporting by Henning Gloystein in London and Michael Kahn in Prague; editing by Jason Neely