UPDATE 1-Italian banks "in great difficulty"- ABI

* Banks put survival at risk in pre-recovery lending

* Banks, employers, govt discuss loan moratorium

* Talks on tax breaks for banks on bad loans

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ROME, July 17 (Reuters) - The head of Italy's banking association has warned banks they put their own commercial survival at risk by supporting government calls to help the country's economic recovery with increasingly risky bad loans.

Italian banks are facing hard times -- torn between growing lending requests by government and businessman and a sheer rise of bad loans which are expected to increase more in the coming 12 months, according to a Bank of Italy official on Friday. [ID:nRON004735]

"Banks should lend to companies ahead of the economic recovery in a way that allows the banks to still be there at the end of the crisis", the banking association ABI head Corrado Faissola said on Friday.

"The commercial banks find themselves in very serious difficulty."

Stress tests conducted on Italian banks showed that they have adequate capital even if the macroeconomic scenario were to worsen, Italy governor Mario Draghi said last week. [ID:nL8637798]

ABI, the employers organisation Confindustria and the Treasury met on Thursday to discuss a moratorium on companies paying off their loans.

The three parties are working on a one-year moratorium on reimbursement of the capital part of company loans, on leasing and mortgage loans, Confindustria Chairwoman Emma Marcegaglia said on Thursday.

Confindustria is aiming for an agreement before the summer break, she said.

"In the first days of August, I hope to have a first document on this protocol" on the moratorium, Faissola said on Friday.

At the same time, Economy Minister Giulio Tremonti is reviewing the tax rules on non-performing loans.

"The discussion on tax relief is parallel. We will see," Faissola said.

"It has been promised that if there will be results (in terms of easier loans) the state will remove a part -- I hope a big part -- of the higher costs that we will bear," he said.

Technical talks will start next week.

The government is keen to kick-start the economy with loans for small and medium-sized companies and is making this aim a requirement on banks that take up government bonds available to shore up their capital. (Reporting by Alberto Sisto; writing by Nigel Tutt; Editing by Mike Nesbit)