UPDATE 2-Italy's Banco Popolare posts third straight loss on loan charges
* Bank booked 1 bln euros of loan writedowns in Q4 alone
* Shares up 3 pct on better-than-expected core capital
* Provisions on bad debts seen still high in 2016, 2018 (recasts with CEO quote, sale of bad debt unit, loan portfolio)
MILAN, Feb 28 (Reuters) - Italy's No. 4 lender Banco Popolare booked 1.7 billion euros ($2.3 billion) of charges to cover bad loans in 2013, setting the tone for the country's banks as they clean their books ahead of an industry health check by European regulators.
The writedowns, of which 1 billion euros were taken in the fourth quarter, led to a full-year net loss of 606 million euros - the third straight annual loss for Banco Popolare - and come ahead of results from other Italian banks next month.
Bad loans have become the biggest problem for Italian banks as the euro zone's third-largest economy struggles to emerge from its longest post-war recession.
Banco Popolare said the Bank of Italy, which has been running inspections at Italy's top 20 banks, had recommended a conservative stance on bad debts so that lenders get a clean bill of health when European regulators publish the results of their sector-wide review later this year.
"They suggested a prudent attitude because the asset quality review will be no joke, and we followed their advice," CEO Pier Francesco Saviotti told analysts on a conference call.
The bank, one of 15 Italian lenders to be scrutinised by the European Central Bank, had already warned investors about the full-year loss and announced plans to complete a 1.5 billion euro share sale in April to bolster its balance sheet.
On Friday, it said the fundraising would give it a core capital ratio of 10.8 percent - above the 10 percent level it had indicated a month ago.
This pushed the stock higher, traders said, and by 1210 GMT it was up 3 percent at 1.57 euros.
The bank also unveiled on Friday a business plan targeting net profit of 609 million euros in 2016 and 787 million euros in 2018, and a core capital ratio of 11.5 percent in 2016.
Yet, in a sign that bad debts will remain a concern for some time to come despite a fledgling economic recovery, Banco Popolare said it expected loan-loss charges to total 700 million euros in 2016 and 662 million euros in 2018.
"2014 will still be undoubtedly heavy (for writedowns)," Saviotti said. He said the cost of credit risk - or net writedowns as a percentage of total loans - was forecast at 1.2 percent this year from 1.85 percent in 2013. "We will start doing better in April-June next year."
The bank, which like other Italian lenders is looking at ways of getting rid of its bad loans, said it wanted to sell a majority stake in Release - a sort of "bad bank" unit holding 3.2 billion euros of gross loans - and had identified five potential buyers.
It also said it had signed confidentiality agreements with three players interested in buying two of its bad loan portfolios worth a combined 1.5 billion euros after write-offs.
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