By Silvia Aloisi

MILAN (Reuters) - Italy's Monte dei Paschi di Siena <BMPS.MI> plans to offer a voluntary debt-to-equity swap to all holders of its 5 billion euros ($5.4 billion) in subordinated bonds, including retail investors, the bank's top executives said on Tuesday.

The conversion is part of an ambitious turnaround plan unveiled by the bank's new CEO Marco Morelli which targets raising 5 billion euros in capital by the end of the year.

After the conversion, the bank will launch a share issue, its third in as many years, to plug the residual capital shortfall.

"For this plan to be successful, a relatively large participation of investors in the liability management exercise would be essential, in our opinion, in the region of at least 40 to 50 percent," analysts at BBVA said in a note.

Chief Financial Officer Francesco Mele said the conversion would target the bank's 5 billion euros in subordinated bonds, the holders of which "had more of an incentive" to back the plan.

He added Monte dei Paschi had received several proposals about the planned swap from groups of bondholders.

Retail investors are estimated to hold some 2 billion euros of Monte dei Paschi's subordinated debt.

Sources close to the matter had until now said small investors could be excluded from the conversion, as involving them makes it necessary to publish a prospectus, delaying the offer's launch.

Mele said the offer would be launched after a Nov. 24 shareholder meeting called to approve the share issue and would last for about 10 days.

Terms and the conditions of the offer have yet to be decided, the CEO said.

Monte dei Paschi emerged as the weakest lender in Europe in continent-wide stress tests in July and must raise capital and shed bad loans to avoid the risk of being wound down.

The Tuscan bank's subordinated debt rallied on Tuesday on the prospect of the conversion.

The yield on a subordinated bond due in September 2020 <XS0540544912=R> fell 1.4 percentage points to 12.8 percent. The yield had soared above 20 percent in late September as investors fretted over Monte dei Paschi's ability to carry out its plan.

(Writing by Valentina Za; Editing by David Holmes)