* Sells 850 mln euros Portuguese bonds, 487.5 mln Italian bonds
* Loss due to closure of risk coverage contracts
* Bank says followed new rules, advice from EU authorities (Adds details)
LISBON, April 1 Portugal's third-largest listed bank BPI said on Tuesday it sold more than 1.3 billion euros ($1.79 billion) of Portuguese and Italian government bonds to comply with new European rules to bolster banks' capital.
It said the sale was aimed at reducing its exposure to government debt and thereby cutting the future volatility of capital ratios. The sale, on which the bank made a pre-tax loss of 132 million euros, represents half of its holdings of medium and long-term Portuguese and Italian government bonds
It follows the introduction of new rules known as Basel III into European law this year, which means that bond holdings are marked to market at all times, BPI said.
"The operation is a direct consequence of the changes in the regulatory framework and does not reflect any judgment concerning the bonds," CEO Fernando Ulrich told reporters.
He said BPI followed recommendations from supervisory and community (European Union) authorities, which have been advising a reduction of the link between sovereign risk and banking sector risk. Asked whether other Portuguese banks could follow suit, Ulrich said: "I have no idea."
BPI sold 850 million euros in Portuguese bonds and 487.5 million euros in Italian bonds and still holds the same amount in each country's debt respectively. BPI added that in 2013, it sold its entire 335 million euro position in Irish public debt.
BPI said that although the sale of the bonds, which have rallied recently, generated capital gains, the risk on the bonds had been covered by derivatives instruments that had to be closed, resulting in the net loss, which will be 102 million euros after tax.
BPI shares had closed 3.4 percent higher on Tuesday before the announcement amid a strong rise in the banking sector thanks to improving investor sentiment about Portugal that beat its budget deficit target last year and is preparing to exit its bailout in May. ($1 = 0.7249 Euros) (Reporting by Sergio Goncalves and Andrei Khalip. Editing by Jane Merriman)