ROME Italy prefers a market solution to save Monte dei Paschi di Siena (BMPS.MI), but should it fail a state rescue would require a forced conversion of the bank's bonds into shares, Treasury sources said on Monday.
Italy indicated last week it was ready to pass an emergency decree if the banking system needed support, but the lender, Italy's third-biggest, said on Sunday it would make a last-ditch push to raise 5 billion euros (4.21 billion pound) privately.
Any state intervention would require the approval of the European Commission and would have to be done according to European rules, which would involve a conversion of the bank's bonds into shares, sources said.
The state could still compensate retail bondholders who lose money, but the details would have to be negotiated with Brussels, sources said.
(This version of the story corrects headline to read "burden sharing" instead of "bail in".)
(Reporting by Giuseppe Fonte, writing by Steve Scherer; editing by John Stonestreet)