UPDATE 2-Monte Paschi delays approval of new rescue plan
* Bank says approval postponed as EU needs complete formal process
* Plan demanded by Brussels to approve 4.1 bln euro bailout
* Restructuring includes 2.5 bln euro capital increase
* Bank needs to find private investors to avoid nationalisation (Adds CEO comment, source paragraph 6-7)
MILAN/ROME, Sept 24 (Reuters) - The board of Monte dei Paschi di Siena, Italy's third biggest lender, delayed approval on Tuesday of a restructuring plan aimed at winning European Union approval for a 4.1 billion-euro ($5.5 billion) state bailout and averting nationalisation.
The world's oldest bank was brought close to financial collapse by the euro zone debt crisis. It is engulfed in a judicial probe over its costly purchase of a rival in 2007 and loss-making trades in financial derivatives which it made in the deal's aftermath.
Under pressure from Brussels, the bank must embark on a toughened-up turnaround plan that includes a 2.5 billion euro capital increase in 2014 - more than twice the amount originally pencilled by its managers.
EU Competition Commissioner Joaquin Almunia said this month that should Monte Paschi fail to raise the funds on the market, the government would have to convert into equity the state loans it gave to the bank in February, effectively taking it over.
The plan had been due to be approved on Tuesday but after a board meeting the bank said this had been postponed because of "the need for the European Commission to complete formal procedural aspects." No new date was given.
"There are details that still need to fall into place. The substance of the operation has been agreed," CEO Fabrizio Viola told reporters.
However, a source familiar with the matter told Reuters: "This is not a formal or procedural matter. There is one issue of substance on which the discussion (with the EU authorities) is still ongoing." The source did not elaborate.
The bank, which had already sent out an invitation to analysts for a conference call on Wednesday morning to present the plan, said no such presentation would now take place.
A spokesman for Almunia said the EU was in contact with the Italian authorities to finalise the terms of the plan, whose main planks have already been agreed upon by Brussels and the Italian economy ministry.
The possibility of the Italian treasury taking a stake in the bank was already contemplated under the terms of the government's bailout scheme. This states that if Monte dei Paschi cannot pay the annual 9 percent coupon due on state loans it would issue shares to the treasury.
However the sheer size of the capital increase demanded by the EU, the third cash call for the bank since 2008, excluding the bailout, makes the prospect of Monte dei Paschi falling under direct government control a lot more likely.
The EU has also requested that the Siena-based lender, founded in 1472, shed more jobs and branches, cut the salaries of its top managers and gradually wind down its 29-billion-euro Italian government bond portfolio.
Monte dei Paschi is already cutting 4,600 jobs and shutting 400 branches under a previous turnaround plan which the EU thought was too soft.
In another sign of the lender bowing to pressure from Brussels, it cancelled coupon payments on three hybrid loans coming due at the end of the month. Almunia had told the Italian government in July that bond holders should share some of the pain of the bank's rescue.
Monte dei Paschi has posted total net losses of nearly 8 billion euros in the past two years, and most analysts do not expect it to return to profit before 2015.
Without the bailout, its core Tier 1 capital adequacy ratio would fall to just 6.5 percent of assets, well below a minimum of 9 percent required by the European Banking Authority, analysts estimate.
The bank's judicial woes are also coming to a head. On Monday the lender asked a London court to stay or dismiss legal action by Japan's Nomura over a risky 2009 derivative trade.
And on Thursday three of the bank's former top managers will stand trial in Siena on charges that they hid from regulators the true nature of the trade with Nomura, which prosecutors allege was made to conceal losses. ($1=0.7412 euros) (Additional reporting by Silvia Ognibene in Siena and Francesco Guarascio in Brussels; Editing by David Evans and Greg Mahlich)