SIENA/MILAN (Reuters) - Italy's struggling Banca Monte dei Paschi di Siena <BMPS.MI> said it is working with the authorities to resolve once and for all the problem of bad loans that is undermining its recovery.


"We are working intensely to find a structural and definitive solution in quick time to our non-performing loans," the bank's CEO Fabrizio Viola said on Thursday.


Italy's No 3 bank, which is saddled with 47 billion euros of non-performing loans, is one of the most exposed of a series of weak Italian banks whose bad debts and capital shortfalls are threatening contagion to other European Union nations.


The lender has been told by the European Central Bank to slash its debts by 40 percent over 2-1/2 years, a move some analysts say could force it to turn to the market or resort to state aid.


The world's oldest bank, which has already tapped investors for 15 billion euros since 2008, is expected to partly fail European stress tests at the end of July, banking sources have said.

At a board meeting on Thursday, Monte Paschi acknowledged receipt of a draft letter from the ECB calling on it to cut its bad debt portfolio but it gave no further details.

"Now we are waiting to receive the final version of the letter from the ECB," Viola said.

Analysts estimate the ECB demands could require additional writedowns at Monte Paschi of around 4 billion euros, leaving it with a capital shortfall to plug.

Earlier on Thursday the lender denied a press report that its board was preparing to announce a capital increase of between 2-3 billion euros.

It last raised money on the market - 3 billion euros - in 2015.

Concerned about fallout ahead of a crucial referendum in October, the Italian government is considering a series of options to support the bank, including injecting capital and increasing the firepower of bank bailout fund Atlante.

Rome is in talks with the European Commission as it seeks to ensure retail investors will not have to shoulder losses in any state-backed bailout.

"The decisions we will have to take will be very important for the whole domestic banking system," Monte Paschi board member Alessandro Falciai said after the board meeting.

Elsewhere on Thursday European Central Bank Vice President Vitor Constancio said Europe should consider "small" state support for its banks to help them get rid of troubled assets.

(Reporting by Silvia Ognibene and Luca Trogni, writing by Stephen Jewkes; editing by Agnieszka Flak and Toby Chopra)