By Silvia Aloisi and Giuseppe Fonte
MILAN (Reuters) - The board of Monte dei Paschi di Siena (MI:BMPS) is expected to approve a request for state aid when it meets later on Thursday, after Italy's third-biggest bank raised less than half of the 5 billion euros (4.22 billion pounds) it needs by the end of the year.
Parliament on Wednesday authorised the Rome government to borrow up to an extra 20 billion euros to prop up failing banks, starting with the Tuscan lender that for years has been at the forefront of Italy's banking woes.
In an effort to avoid being wound down because of a huge bad loan pile, Monte dei Paschi has managed to raise 2 billion euros in capital by asking junior bondholders to convert their debt into equity.
However, a share offer that ended at 1300 GMT on Thursday has failed to attract demand partly due to rising political risks in Italy after a Dec. 4 referendum unseated the reformist government of Prime Minister Matteo Renzi.
Political sources said new Prime Minister Paolo Gentiloni is ready to call a cabinet meeting late on Thursday or early Friday to approve a decree authorising state aid to the bank, the world's oldest still in business.
Italian financial newspaper Il Sole 24 Ore said the bailout plan could take two to three months to be arranged, starting with a government guarantee of Monte dei Paschi's own borrowings to ensure it does not run out of cash.
The bank has been bleeding deposits heavily and on Wednesday it said its liquidity could run out after four months. Only days earlier it had estimated it would last for 11 months.
Monte dei Paschi's failure would shake the foundations of Italy's banking industry, the euro zone's fourth largest and home to a third of the bloc's bad debts.
But also a state bailout carries risks due to EU rules that require private investors to suffer losses before taxpayer funds can be tapped, a politically explosive issue given 40,000 retail investors hold bonds in Monte dei Paschi.
The Siena-based bank has been laid low by ill-judged acquisitions and mismanagement and it is saddled with the largest proportion of bad debts among Italian lenders compared to its capital.
It needs money to cover losses from a planned 27 billion euro bad loan sale needed to comply with a request by the European Central Bank.
It has arranged its rescue plan with the help of Wall Street investment bank JPMorgan (N:JPM) betting on a 1 billion euro investment by Qatar's investment authority.
Confirming an earlier Reuters report, the bank said late on Wednesday it had failed to secure an anchor investor for its offer of new shares.
For the state to step in, Monte dei Paschi would need to force at least some of its creditors to convert their bonds into equity.
Economy Minister Pier Carlo Padoan said on Wednesday the impact on retail savers would be "absolutely minimised or inexistent."
Ordinary Italians have already suffered billions of euros of losses due to a string of bank crisis after a harsh recession weakened the country's lenders exposing the damages wrecked by crony lending and inefficient management.
Other banks also need to strengthen their balance sheets, including Banca Popolare Di Vicenza, Veneto Banca and Banca Carige. Italy is also struggling to find a buyer for four small banks rescued from bankruptcy a year ago -- Banca Etruria, Banca Marche, CariFerrara and CariChieti.
If the government uses all the 20 billion euros it is authorised to spend on the banking sector, it will worsen the country's already difficult debt position.
Italy's debt stands at some 133 percent of gross domestic product (GDP) -- second only to Greece in the euro zone. A further 20 billion euro of debt will push the ratio above 134 percent.