* Monte Paschi chair pledges profits, say loans to be repaid
* Political storm grows, with Democrat Party under fire
* Northern League says state loans to bank must be blocked
By Gavin Jones and Danilo Masoni
ROME/MILAN, Jan 27 Monte dei Paschi di Siena said on Sunday it was seeking a financial investor as the political storm over a derivatives scandal at the ailing bank intensified ahead of next month's Italian election.
Italy's third-biggest lender, which needs state loans to stay afloat, this week revealed opaque derivatives trades, conducted between 2006 and 2009, that could cost it some 720 million euros.
The scandal has turned the spotlight on Monte Paschi's close political ties with the centre left and on possible oversight failings by the Bank of Italy (BOI), then led by current European Central Bank chief Mario Draghi.
"I would like to have a long-term financial investor," Monte Paschi Chairman Alessandro Profumo told Italian business daily Il Sole 24 Ore on Sunday. "Nationality is not a problem. The important thing is that it believes in our project".
Profumo was appointed head of a new management team last year to try to turn around the world's oldest bank.
At the root of Monte Paschi's problems is the acquisition in 2007 of smaller rival Antonveneta for a massive 9 billion euros in cash, stretching its finances to the limit just months before the global financial crisis hit.
Siena prosecutors are investigating why the bank paid such an inflated price for Antonveneta shortly after Spain's Santander had purchased it from ABN Amro for just 6.6 bln euros.
After an all-day board meeting on Saturday, the Bank of Italy gave approval to Monte Paschi's request for 3.9 billion euros ($5.3 bln) of state loans, to be issued by end-February, though one leading politician said they should now be blocked.
The Tuscan bank was forced to seek state aid last year for the second time since 2009 after becoming one of just four European lenders that failed to meet tougher capital requirements set by regulators.
Under the loan scheme Monte Paschi will issue 3.9 billion euros of bonds to the Treasury, with just under half of these replacing 1.9 bln euros of loans made under a previous plan.
Profumo on Sunday rejected suggestions the bank will be nationalised and said he was confident it would be able to pay back the loans and interest in cash over the next five years.
"We believe in this. The objective is to return to profits already during the course of this year," he said.
However the scandal surrounding Monte Paschi is dominating the Italian media and has shot to the head of the campaign for the Feb 24-25 election.
"NO LONGER SUSTAINABLE"
Corriere della Sera daily on Sunday published excerpts from the minutes of Monte Paschi meetings in 2011 showing several board members expressing concern about the bank's portfolio, overladen with long-term Italian government bonds.
"The situation is no longer sustainable, we must take steps to reduce these positions," said former vice chairman Francesco Caltagirone in September 2011 as Italian government bond yields soared during the apex of the euro zone debt crisis.
Among complex instruments used to finance the Antonveneta deal were convertible loans known by the acronym FRESH (Floating Rate Equity-Linked Subordinated Hybrid Preferred Securities).
Advisory group Rothschild on Sunday denied a press report that it had assisted with the operation.
Monte Paschi's new management have said the main loss-making derivatives it uncovered involved Japanese bank Nomura and Deutsche Bank.
Centre-right politicians are seeking maximum political capital from the bank's close ties to the Democratic Party (PD), which has a shrinking but still comfortable lead in the polls.
Siena has been a left-wing stronghold for decades and the bank's biggest shareholder is a charitable foundation controlled by PD politicians accustomed to using dividends from the bank for local initiatives to bolster their support.
"The PD can't even run a bank, so how can we trust them to run the country," said centre-right leader Silvio Berlusconi on Saturday.
PD leader Pier Luigi Bersani threatened to "tear apart" anyone who suggested his party was responsible for wrongdoing at Monte Paschi but Angelino Alfano, a top official in Berlusconi's People of Freedom party said the PD was "in it up to its neck."
Roberto Maroni, head of the pro-devolution Northern League, attacked Prime Minister Mario Monti, who is heading a centrist alliance at the vote, and said state loans to Monte Paschi must be blocked until criminal investigations were concluded.
"If the bank has done things against the law it can't receive public money, that is so simple and obvious that even the prime minister should understand it."
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