UPDATE 1-Mediolanum sees record 2012

* Increased profits to help fund cash calls

* Mediolanum holds 11.8 bln euro Italy state bonds

* Mediolanum received 3 bln euros of ECB funds (Releads, adds CEO comments)

By Maria Pia Quaglia and Stephen Jewkes

MILAN, July 31 (Reuters) - Italian asset manager Mediolanum expects to post a record net profit this year after its earnings in the first-half more than doubled as it used cheap European Central Bank funds to buy high-yielding Italian bonds.

"We are predicting a record year (for net profit) even if we expect market volatility to continue," Mediolanum's Chief Executive Ennio Doris told Reuters on Tuesday.

Earlier on Tuesday Mediolanum said its net profit in the first half rose 125 percent to 217.5 million euros as it put to use cheap money from the European Central Bank.

Doris said part of the increased profits would be used to help fund capital increases.

Mediolanum, in which former Italian Prime Minister Silvio Berlusconi is a major shareholder, is seeking to strengthen the balance sheet of its banking unit Banca Mediolanum.

It will do so by completing a previously launched capital increase of 500 million euros and paying a first tranche of a new 200 million euro cash call in the second half.

"The aim is to take Core Tier 1 - a measure of financial strength - to over 10 percent in 2012 and 11 percent in 2013," Doris said.

By beefing up the bank's capital base Mediolanum hopes to be able to meet Basel III requirements and to invest more in higher-yielding market opportunities, mainly Italian state bonds.

Mediolanum currently holds a total of 11.8 billion euros of Italian sovereign bonds along with 4.3 billion euros of Italian financial securities, as well as 0.6 billion euros of Spanish government bonds.

Burdened with a 2 trillion euro debt and in the grip of recession, Italy has seen its debt costs track Spain's higher as Madrid struggles to retain market access amid budget troubles.

"The insolvency risk of Italy is nonexistent. If the situation had been serious the government's spending review would have been much higher," Doris said, adding he was confident ECB head Mario Draghi would take measures to bring peripheral bond yields down.

At the end of June, Banca Mediolanum had 3 billion euros of three-year ECB funds on its books.

To diversify the funding of the bank, Mediolanum said on Tuesday it had approved the issue of non-convertible bonds for up to 300 million euros that can be launched before the end of 2013.

Doris said the group's dividend policy would remain unchanged and ruled out the possibility of any acquisitions to help fuel growth.

"We will grow organically," he said. (Reporting By Stephen Jewkes and Maria Pia Quaglia; Editing by Louise Heavens)