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Italian Economy Ministry sees no need for publicly funded "bad bank"

* Italian banks trying to shed bad loans to help balance sheets

* PM Letta denies report he is against a "bad bank"

* Non-performing loans have risen during long recession

By Gavin Jones

ROME, Feb 10 (Reuters) - Italy's Economy Ministry on Monday backed initiatives by lenders to offload their bad debts but said it saw no need to set up a "bad bank" using either public or European Union funds.

Italian banks are trying to improve their balance sheets as European regulators conduct a health check of the sector.

Data on Monday showed bad loans surged at an annual rate of almost 25 percent in December, as companies and families strained to pay their debts and Italy struggled to emerge from a long economic crisis.

The ministry said in a statement that it supported all efforts by banks to "lighten their load" of non-performing loans, but it believed there was "no need for the use of public resources, either at the national or EU level".

Central bank governor Ignazio Visco on Saturday urged Italy's lenders to take "ambitious" steps to get bad loans off their books, fuelling speculation that Italy might set up a "bad bank," like Spain and Ireland. He gave no details, but a Bank of Italy spokeswoman said he was referring to private-sector action or possible joint public and private action.

Deputy Governor Salvatore Rossi told Reuters that Italy's strained public finances meant it could not afford a publicly funded bad bank.

The ministry's statement followed a report in the Financial Times on Monday that Prime Minister Enrico Letta had rejected the idea of a public bad bank because he feared it could prompt downgrades of Italy's sovereign credit ratings. The report was denied by Letta's spokesman, who said Letta "has never expressed any opposition to a bad bank".

Italy's top two banks, Intesa Sanpaolo and UniCredit, are in preliminary talks with U.S. investor KKR about setting up a fund to hold some of their bad debts, sources close to the matter have told Reuters.

Italy's longest post-war recession has made it tough for companies to keep up loan payments.

UniCredit has already sold 700 million euros ($953 million)of non-performing loans to Anacap Financial Partners and 950 million euros to private equity fund Cerberus European Investments.

Intesa Sanpaolo, Italy's largest retail bank, is working on plans to create an internal "bad bank" for problem loans, according to a source close to the situation.

And Mediobanca is studying setting up funds for the bad loans of smaller banks that may not have enough capital to deal with the problem by themselves.

Italy has lagged behind Spain and Ireland in restructuring its banks, analysts say, but an asset-quality review by the European Central Bank is pushing lenders into action.

Non-performing loans at Italian banks, the ones least likely to ever be repaid, have reached 150 billion euros and are expected to keep rising through 2016, according to think tank Prometeia.