UPDATE 1-Italian banks fall as Italy/Bund spread widens
* UniCredit down over 4 pct, Intesa Sanpaolo more than 5 pct
* BTP/Bund spread, political uncertainty weigh on banks
(Adds quote, background, updates shares)
By Michel Rose and Valentina Za
MILAN, July 27 (Reuters) - Shares in leading Italian banks Intesa Sanpaolo and UniCredit fell sharply on Wednesday as the yield premium on 10-year Italian government bonds over their German equivalents widened by 15 basis points.
Italian banks have reflected the moves of the yields on the government bonds, known as BTPs, because of their exposure to Italian sovereign bonds and worries that the euro zone crisis could spread to debt-laden Italy.
The Italian BTP spread over German Bunds expanded by 15 basis points to 305 basis points early on Wednesday. The BTP/Bund yield gap was at around 290 basis points late on Tuesday, according to Tradeweb data.
"There's somebody abroad playing the BTP/Bund spread against a basket of (Italian) banks. But the speculative attack doesn't only come from abroad; there's also a political matrix to this," a Milan-based trader said.
He cited press reports, including from Wednesday's Financial Times, that envisaged the possibility of a technical government headed by former European Commissioner Mario Monti to put an end to the political instability in Silvio Berlusconi's government.
Intesa Sanpaolo, the largest Italian retail bank, was briefly suspended for excessive losses, and was trading down 5.5 percent by 0856 GMT. UniCredit, Italy's largest banks by assets, was down more than 4.7 percent.
Italian banks underperfomed their European peers, with the Thomson Reuters Italy Banks index down 4.6 percent, while the STOXX Europe 600 banks index was down 2.1 percent.
Italian government bond yields rose after German Finance Minister Wolfgang Schaeuble said Berlin was against a carte blanche for the euro zone's rescue fund to purchase bonds on the secondary market.
Nomura also cut its price target on several Italian banks on Wednesday. (Editing by Will Waterman)
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