* 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 have seized 15 million euros ($20.4 million) from Bank of America Merrill Lynch as part of a probe into alleged fraud involving derivative contracts with the city of Verona, the police said on Thursday.
The seizure, which took place at the bank's Milan headquarters, was ordered by Verona prosecutors, a police spokesman said.
"The seizure ... is linked to allegations of hidden commissions in the underwriting of derivative contracts dating back to 2007," a source at the tax police in Verona told Reuters.
The overall amount of the contracts in question was 256 million 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 was ready to reach a settlement with the U.S. bank.
"The administration is ready to seek a negotiated settlement with the counterparty to better safeguard the financial position of the city regardless of future legal developments in the criminal case," Tommaso Iaquinta told Reuters.
The city reached an out-of-court settlement with Italian lender UniCredit on derivative contracts earlier this year.
The seizure is the latest in a series of disputes over derivatives deals between cash-strapped Italian local authorities and banks they accuse of not being transparent in their dealings.
In June Italian region Piedmont reached a settlement with Merrill Lynch over two derivative contracts worth about 1.8 billion 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 of Milan. The banks have denied any wrongdoing.