* Bad loans may be regrouped in one or more funds-source
* Funds would be open to foreign investors-source
By Gianluca Semeraro
MILAN, Feb 4 (Reuters) - Italy's Mediobanca is working on plans to set up a fund to package the bad loans some of the smaller Italian lenders built up during the recession, a source close to the matter said.
The Italian investment bank is in contact with the Bank of Italy over the possibility of setting up an alternative to a "bad bank" and could launch the fund, or funds, as early as this summer, said the source, who spoke on condition of anonymity.
Foreign investors could take stakes in those funds, the source added.
Debate has mounted over the need for a bad bank in the euro zone's third-largest economy as non-performing loans are expected to keep on rising, leaving smaller and less well-capitalised lenders vulnerable. Spain and Ireland set up bad banks at the height of the euro zone crisis.
Italian banks have had to set aside billions of euros to cover loan-loss charges partly in response to the Bank of Italy's demands to hike provisions since late 2012 ahead of this year's sector-wide review by the European Central Bank.
Italy's biggest retail bank, Intesa Sanpaolo, is working on plans to set up an internal bad bank which would take a chunk of its 55.5 billion euros of gross problem loans, a source familiar with the situation said on Monday.
Intesa's rival UniCredit announced on the same day that it was selling another batch of bad debts to specialist private equity firm Anacap Financial Partners.
Separating bad loans in a bad bank or similar vehicle can help improve the visibility of good assets and also makes it easier to sell portfolios of non-performing loans, analysts say.
The source said Mediobanca was considering creating different funds depending on the type of bad loans - for example by having a fund dedicated to real estate assets.
Non-performing loans - or the bad loans least-likely to be repaid - have reached 150 billion euros ($202.8 billion) in Italy and are expected to keep climbing through 2016, according to economic think tank Prometeia.
($1 = 0.7397 euros) (Writing by Silvia Aloisi, editing by Luca Trogni and Louise Heavens)