By Valentina Za

MILAN (Reuters) - UniCredit <CRDI.MI> was hit by a slump in Italian banking stocks on Monday as it began Italy's biggest corporate share sale in an attempt to raise 13 billion euros ($14 billion) to rebuild its capital after a balance sheet clean up.

Italian banks are struggling to deal with bad loans left behind by a deep recession, leading to capital raisings and consolidation as Rome tried to steady confidence.

UniCredit's shares held up relatively well after the bank launched its rights issue, but closed down 6.9 percent at 12.21 euros, while Italy's banking index <.FTIT8300> fell 4.7 percent.

The price of the rights to buy into the cash call <CRDI.MI_r.MI>, Europe's largest since 2010, finished 18.85 percent lower, with traders saying they were moving in sync with the shares and there was no sign of speculative arbitrage.

Shareholders who do not want to "follow" their rights tend to sell in the first days of the process, traders said.

However, Monday's losses were amplified by the spread between 10-year Italian and German government bonds hitting 200 basis points, its highest since mid-October 2014.

This was due to wider investor uncertainty about Europe's future after France's National Front leader Marine Le Pen pledged at the weekend to take her country out of the euro zone if she wins the presidential election.

Shares in UBI <UBI.MI> fell 5.5 percent, Banco BPM <BAMI.MI> shed 5.9 percent and Intesa Sanpaolo <ISP.MI> lost 2.4 percent.

UniCredit said last week it will post an 11.8 billion euros loss for 2016 due to one-off hits stemming mainly from loan writedowns, as it prepares to offload 17.7 billion euros in bad debts under a restructuring plan outlined in December.

This follows the hiring by Italy's biggest bank by assets of French investment banker Jean Pierre Mustier as chief executive in July, with a brief to address concerns about UniCredit's capital base.

INVESTOR SEARCH

Shareholders who do not exercise their rights face a dilution of more than 70 percent. UniCredit said on Friday that none of its shareholders with a stake of at least 3 percent had yet committed to buy into the share sale.

Its top shareholder is U.S. investment firm Capital Research and Management Company with 6.7 percent, followed by Abu Dhabi's sovereign wealth fund Aabar and asset manager BlackRock <BLK.N> with a stake of about 5 percent each.

Sources told Reuters on Jan. 11 Aabar was set to buy into the share issue to keep its stake unchanged, but one source said last week this should not be taken for granted.

UniCredit is offering 13 new shares - at 8.09 euros each - for every five ordinary or savings shares, representing a 38 percent discount to the shares, excluding subscription rights.

The share offer - the bank's second since 2012 when it tapped the market for 7.5 billion euros - is due to end by March 10, when a coupon payment is due on some high-risk bonds that UniCredit would not be able to honor without improving its capital ratio.

($1 = 0.9300 euros)

(Editing by Alexander Smith)