* Banco Popolare shares fall 14 pct to record low
* Bank booked writedowns ahead of merger with Popolare Milano
* Italian banking shares dogged by concerns over bad loans (Recasts with details)
By Valentina Za
MILAN, May 11 (Reuters) - Shares in Banco Popolare plunged 14 percent on Wednesday after a surprise first-quarter loss driven by loan writedowns -- the main focus of investor concerns over Italian banks.
Banco Popolare booked loan writedowns requested by the European Central Bank as a condition for approving a planned merger with Banca Popolare di Milano that will create Italy’s third-biggest banking group.
To improve its loan loss provisions Banco Popolare must raise 1 billion euros in a share issue slated for early June.
Investors are expected to be more supportive of the move than was the case when Banca Popolare di Vicenza (IPO-BPVS.MI) tried to raise cash last month and had to be supported by a new bank rescue fund.
Shares in Banco Popolare lost 14 percent by 1040 GMT, hitting a record low of 4.14 euros.
Popolare Milano lost 10 percent to 0.50 euros, against a 3 percent drop in Italy’s banking index.
Italian banks have lost nearly 40 percent of their market value so far this year, weighed down by concerns they could need additional capital to shoulder losses from sales of bad loans that rose to 360 billion euros ($410 billion) during a long recession.
A share rebound triggered by the hasty creation last month of the fund intended to inject capital into weaker lenders and buy their bad loans proved short-lived.
Banco Popolare said late on Tuesday that it had written down loans for 684 million euros in the first quarter, nearly four times more than in the same period of 2015, posting a net loss of 314 million euros for the first three months.
CEO Pierfrancesco Saviotti told an analyst call that the loan writedowns were the first step towards selling chunks of bad loans and that it would book further provisions this year.
He said the ECB wanted provisions to cover 62 percent of the most troubled loans up from a 60 percent coverage ratio the bank reached in the first quarter.
Bankers say other Italian banks are likely to follow in the steps of Banco Popolare and raise cash to make up for loan losses.
Loans to insolvent borrowers are valued on average at around 40 percent of their nominal value on Italian banks’ balance sheets but market prices for these assets reach at most 30-35 cents on the dollar when the loan is backed by a good-quality property.
The government has tried to boost market prices for bad loans through a number of measures but stringent European Union rules on state aid have prevented more decisive action. ($1 = 0.8777 euros) ($1 = 0.8782 euros) (Reporting by Valentina Za; Editing by Elaine Hardcastle and Keith Weir)