* Police probing derivative contracts from 2007 - source
* Verona city seeking negotiated settlement
* Merrill Lynch declines immediate comment
ROME/MILAN, Oct 3 (Reuters) - Italy's financial police haveseized 15 million euros ($20.4 million) from Bank of AmericaMerrill Lynch as part of a probe into alleged fraudinvolving derivative contracts with the city of Verona, thepolice said on Thursday.
The seizure, which took place at the bank's Milanheadquarters, was ordered by Verona prosecutors, a policespokesman said.
"The seizure ... is linked to allegations of hiddencommissions in the underwriting of derivative contracts datingback to 2007," a source at the tax police in Verona toldReuters.
The overall amount of the contracts in question was 256million euros, the source added.
Merrill Lynch, which was bought by Bank of America in 2009,declined immediate comment.
A lawyer for the city of Verona said the city council wasready to reach a settlement with the U.S. bank.
"The administration is ready to seek a negotiated settlementwith the counterparty to better safeguard the financial positionof the city regardless of future legal developments in thecriminal case," Tommaso Iaquinta told Reuters.
The city reached an out-of-court settlement with Italianlender UniCredit on derivative contracts earlier thisyear.
The seizure is the latest in a series of disputes overderivatives deals between cash-strapped Italian localauthorities and banks they accuse of not being transparent intheir dealings.
In June Italian region Piedmont reached a settlement withMerrill Lynch over two derivative contracts worth about 1.8billion euros.
In December 2012, an Italian court found Deutsche Bank, Depfa Bank, JP Morgan and UBS guilty of fraud for mis-selling derivatives to the city ofMilan. The banks have denied any wrongdoing.
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