Monte dei Paschi di Siena (BMPS.MI) will tap investors for up to 2.5 billion euros next year to fill a capital deficit laid bare by recent stress tests and pay back state aid in a move bankers said would prepare the Italian lender for a likely takeover.

The future of Italy's third biggest bank, the world's oldest, has been hanging in the balance after a review overseen by the European Central Bank showed it to be the weakest large bank in Europe with a capital hole of 2.1 billion euros that needs to be filled within nine months.

The rights issue is seen as a stepping stone to a sale of Monte dei Paschi, possibly to smaller domestic rival UBI Banca (UBI.MI), after a calamitous three years that have seen it lose 9.3 billion euros and have its former top brass convicted last week over opaque derivatives trades that were meant to hide the bank's mounting losses.

The bank said on Wednesday its board had approved a capital increase of up to 2.5 billion euros, to be carried out after 2014 results are approved, to plug the capital gap and pay back early 1.1 billion euros it still owes to the Italian state.

The bank will decide on the actual size of the rights once European authorities have approved its capital plan, which also includes asset sales and other measures for 220 million euros.

"The reason why they are tapping the market is because they didn't have time to put in place an M&A solution in the time frame given to them by the ECB," said a banker working on the share sale. "But the M&A solution will follow sometime next year."

The bank needs to submit its capital-boosting plan to the ECB by Nov. 10 and its chairman Alessandro Profumo, appointed in 2012 to try to turn the bank around after a costly acquisition in 2007 drained its finances, told Reuters in an interview last week a merger was one of the options under consideration.

UBI has said it has had "no contact whatsoever" with Monte dei Paschi on a possible deal but bankers say a tie-up with a mid-sized Italian player such as UBI was politically more palatable because it would avoid the sort of large job cuts that would be triggered from a takeover by bigger banks such as Intesa Sanpaolo (ISP.MI) and UniCredit (CRDI.MI).

Other banks that have been flagged as potential bidders include Spain's Santander (SAN.MC) and France's BNP Paribas (BNPP.PA) but they have both denied they are interested.

The possibility of a deal would encourage hedge funds and other funds to take part in yet another share sale for a bank exposed to Italy's weak economy, bankers said.

Monte dei Paschi has already carried out three capital increases since 2008 with the last share sale raising 5 billion euros in June. Since then Monte dei Paschi's market value has tumbled to just 3.3 billion euros compared to 11 billion euros when it bought smaller rival Antonveneta for 9 billion in cash in 2007.

Global coordinators for the rights issue will be UBS and Citigroup, which Monte Paschi has hired to advise it on strategic options, as well as Goldman Sachs and Mediobanca, the bank said.

Barclays, Bank of America-Merrill Lynch, Societe Generale, Commerzbank and Deutsche Bank would act as bookrunners. Banks that underwrite the sale will buy any stock that is left unsold.

Any potential bidder for Monte dei Paschi would be in wait-and-see mode to understand what the bank and its management can do to get their house in order, a senior banker told Reuters.

The Tuscan bank has been selling assets, closing 500 branches and cutting 8,000 jobs to boost its finances.

Its woes have fragmented its shareholder base, once dominated by a charitable foundation run by allies of local left-wing politicians.

Its biggest single investor is now York Capital Management, a U.S. hedge fund, with a 5 percent stake.

Latin American investors Fintech and BTG Pactual, which bought into the June rights issue, have 4.5 percent and 2 percent respectively and are likely to take part in the new share sale, according to sources close to the matter.

The banking foundation which has 2.5 percent stake after cutting it from more than 30 percent last year to pay back debts will also take part, as will French insurer Axa - a core shareholder with 3.7 percent.