* Bank set to scrap 4 percent cap on size of stakes
* Change aimed at attracting investors for capital hike
* Small investors worried bank could become takeover target
By Silvia Aloisi
MILAN, July 18 (Reuters) - Italy's Monte dei Paschi is set to change its ownership rules on Thursday, seeking to lure new investors to pay back state aid and potentially opening the way to a takeover of the world's oldest bank.
An extraordinary shareholder meeting is expected to vote in favour of scrapping bylaws that say only Monte dei Paschi's top investor - a charitable foundation with links to local politicians - can hold more than 4 percent of the lender.
The move comes ahead of a planned 1 billion euro ($1.3 billion) capital increase due to be launched next year and aimed at new investors to help reimburse a 4.1 billion euro state bailout the lender was forced to take earlier this year.
It also marks a watershed for Italy's third biggest bank, known as "Daddy Monte" in its medieval hometown of Siena, making it potentially vulnerable to a takeover for the first time in its five centuries of history.
On Monday, the Monte dei Paschi foundation, which has a 33.5 percent stake in the lender, said it would vote in favour of the ownership changes at Thursday's shareholder meeting, meaning they are certain to pass.
Monte dei Paschi, founded in 1472, is at the centre of a high-profile investigation into risky derivative trades and has been the only Italian bank to need state aid to shore up its strained capital base.
Chairman Alessandro Profumo, appointed last year to turn the bank's fortunes around, has said scrapping the ownership ceiling is needed to win approval for the bailout by the European Commission and ensure the planned cash call will be successful.
Small shareholders, however, fear the bank, which is the biggest employer in Siena, could fall prey to unwanted suitors.
"At current market prices, with 1 billion euros you can buy 40 percent of the bank," Romolo Semplici, head of a group of small shareholders, told Reuters.
"We feel management is giving potential bidders a chance to put a gun to our head in the future and do what they want, fire people and perhaps even move the bank away from Siena," he said.
Chief Executive Fabrizio Viola said on Tuesday there were no contacts with potential new investors yet.
Until now, the 4 percent stake limit had helped the Monte dei Paschi foundation keep a tight grip on the bank.
But as the lender ran into trouble during the euro zone's debt crisis, so did the foundation, which accumulated huge debts to fund two capital increases at the bank in 2008 and 2011.
Last year the cash-strapped foundation, which only two years ago owned more than 50 percent of the bank, began cutting down its holding to pay back creditors.
It still has a big enough stake to have a blocking minority at shareholder meetings, although it faces further dilution of its stake when the next capital increase is carried out.
$1 = 0.7612 euros Reporting by Silvia Aloisi; Editing by Isla Binnie and Mark Potter