By Lisa Jucca and Stefano Bernabei
MILAN/ROME (Reuters) - Bowing to European Union requests, loss-making Italian bank Banca Monte dei Paschi di Siena
Italy's third-largest lender by assets had received 4.1 billion euros ($5.57 billion) in special state loans earlier this year after the euro zone crisis and a derivatives scandal brought it to the brink of collapse.
But European Commission has said it would only give a green light to the state aid if the bank produced a new turnaround plan and agreed to a larger-than-planned 2.5 billion euro share sale, roughly equivalent to its market value.
In the new plan, the bank's second in 18 months, Monte dei Paschi said it would shed around an additional 3,400 jobs and target 440 million euros of cost cuts.
Chief Executive Officer Fabrizio Viola said the measures unveiled on Monday would help Monte dei Paschi to become a leaner commercial bank by reducing risks in its balance sheet.
"This business plan is solid because we do not start by zero," he said, referring to cost saving and other measures the new senior management has carried out since taking the helm of the crisis-hit bank in early 2012.
The world's oldest bank came close to collapse during the euro zone debt crisis. It is embroiled in a judicial investigation over its purchase of a rival in 2007 and loss-making trades in derivatives which it made after that deal.
Under the new turnaround plan, the Tuscan bank said it would aim to repay the state loans fully by 2017 and make a net profit of 900 million euros by that date.
The new plan targets 8,000 job cuts, up from around 4,600 in its original plan. The bank had cut 2,700 jobs at end June.
Monte dei Paschi said it would undertake the 2.5 billion euro capital hike, required by the EU, in 2014, and repay 3 billion euros of state aid in the same year.
Viola and Chief Financial Officer Bernardo Mingrone said they hoped the turnaround plan would secure European Union approval needed for its life-saving state loans by November 14, when the bank is due to unveil third-quarter results.
As requested by the EU, the bank also said it would reduce its holdings of Italian government debt earmarked as 'asset for sale', the highest in the Italian banking system, to around 17 billion euros by end 2017 from 23 billion euros currently.
The bank also committed to cap the maximum salary for its top executives at 500,000 euros per year until the capital hike is carried out or the state aid is fully repaid.
If Monte dei Paschi fails to secure investors for its capital increase, which is more than twice the amount originally envisaged and its third cash call since 2008, the bank will be partly nationalised.
Monte dei Paschi has posted total net losses of nearly 8 billion euros in the past two years and most analysts do not expect it to return to profit before 2015.
Shares in Monte dei Paschi ended up 6.3 percent on Monday, before details of the plan were published.
($1 = 0.7355 euros)
(Writing by Lisa Jucca and Francesca Landini, Additional reporting by Stephen Jewkes; Editing by Erica Billingham and Jane Merriman)