UPDATE 3-Monte Paschi's biggest investor denies stake sale
* Foundation says did not sell holding on Wednesday
* Stake sale speculation pushed shares up
* Newspapers reported foundation sold between 8 and 12 percent
MILAN, March 6 (Reuters) - The biggest shareholder in Monte dei Paschi di Siena on Thursday denied press reports that it had sold a stake of at least 8 percent in Italy's third-largest bank.
Three Italian newspapers reported that the Monte dei Paschi foundation had sold between 8 and 12 percent of the loss-making bank on Wednesday, sending its shares sharply higher in early trading for a second consecutive day.
But the foundation - a not-for-profit entity with close ties to local politicians that owns almost one third of Monte dei Paschi - said no transaction was carried out on Wednesday, and the shares fell.
Monte dei Paschi, the world's oldest bank still in business, was bailed out by the state with 4.1 billion euros ($5.7 billion) of aid last year after being hit by the sovereign debt crisis and a derivatives scandal.
Market watchdog Consob is investigating the 20 percent rise in its share price on Wednesday in heavy volume of 1.5 billion shares - more than 10 percent of the bank's capital - a source at the regulator said.
The cash-strapped foundation is desperate to find a buyer for the bulk of its stake before the bank launches a 3 billion euro ($4.12 billion) capital increase in June.
The foundation needs the money to repay its creditors and fears the share issue that the bank needs to repay the government would greatly reduce the value of its holding.
In a statement on Thursday issued at the watchdog's request, the foundation said it had "not entered into any sale or purchase contract regarding its stake in Monte dei Paschi."
The newspapers named U.S. hedge fund Och-Ziff as one of the buyers.
A spokesman for Och-Ziff Capital Management, which oversees $42 billion for pension funds and other wealthy investors, said the fund had not bought 8 percent of the Italian bank. He declined to comment further on Och-Ziff's recent trading activities.
Anyone buying a stake in an Italian listed company of more than 2 percent has to inform the regulator within five days.
An investor selling a big chunk of a company's shares would usually push the stock price down.
But if the foundation does find investors willing to take a large stake in the bank and maybe even buy into the upcoming share issue, that would boost Monte dei Paschi's shares by removing some uncertainty and possibly also fuelling takeover speculation, traders and bankers say.
Monte dei Paschi's shares initially held their gains after the foundation's denial on Thursday but then fell suddenly and were temporarily suspended for excessive volatility in mid-morning trade.
They closed 1.8 percent lower at 0.216 euros on Thursday with more than 1 billion shares traded.
"We're fumbling in the dark to work out why it's moving like this as well," said a trader.
"There is obviously speculation on the MPS stock but it's not enough to justify these volumes."
Filings from the market watchdog on Thursday showed hedge fund Egerton Capital and trading firm Susquehanna had covered some of their short positions on the stock, meaning they bought small amounts of shares.
Italian financial daily Il Sole 24 Ore reported on Thursday that the foundation sold a stake the previous day of around 8 percent to investors that included Och-Ziff, at a price of 0.16-0.17 euros.
Il Messaggero daily said a 12 percent stake had been sold and also named Och-Ziff as a buyer. A third newspaper, Il Fatto Quotidiano, said the stake sold to Och-Ziff was 8-10 percent.
The three newspapers did not respond to a request for comment following the foundation's denial.