* BOI chief Visco urges "more ambitious" moves on bad loans
* Says banks must support economy to regain public trust
* Warns economic recovery is "weak, uncertain"
* Expects Q4 data to show first GDP growth since mid-2011 (Adds quotes, context)
By Gavin Jones
ROME, Feb 8 Bank of Italy Governor Ignazio Visco on Saturday backed moves by some of the country's lenders to get rid of non-performing loans on their books and suggested they could consider "more ambitious" approaches.
The comments by Visco and his deputy governor at a Rome conference indicate that while Italy cannot afford to set up a public "bad bank" like those adopted in Spain and Ireland, its banks are being encouraged to find similar private sector solutions.
Italy's top two banks, Intesa Sanpaolo and UniCredit, are in preliminary talks with U.S. investor KKR about setting up a fund to hold some of their bad debts, sources close to the matter have told Reuters.
Such a vehicle, the latest move by Italian lenders to tackle loans that have soured over years of economic stagnation, would help clean up balance sheets as European regulators conduct a health check of euro zone lenders.
"The actions under way at a number of banks to rationalise the management of non-performing loans by creating dedicated structures ... go in the right direction," Visco said in his speech to a gathering of market participants.
"More ambitious interventions, whose compatibility with European rules must be pondered, are not to be ruled out," he said, noting that Italy has an underdeveloped market in impaired assets.
Visco, who sits on the governing council of the European Central Bank, offered no further details, but a Bank of Italy spokeswoman said he was referring to private sector initiatives or possible partnerships between the public and private sector.
Bank of Italy Deputy Governor Salvatore Rossi told Reuters Italy's strained public finances meant it could not follow Spain's example in setting up a publicly-funded "bad bank" to take over problematic loans.
"I think our larger banks can find solutions for bad loans on their own, the others may want to consider joint solutions," said Unicredit Chief Executive Federico Ghizzoni.
Italy's longest post-war recession has made it tough for companies to keep up loan payments.
UniCredit has already sold 700 million euros ($953 million)of non-performing loans to Anacap Financial Partners and 950 million euros to private equity fund Cerberus European Investments.
Intesa Sanpaolo, Italy's largest retail bank, is working on plans to create an internal "bad bank" for problem loans, according to a source close to the situation.
And Mediobanca is studying setting up funds for the bad loans of smaller banks that may not have enough capital to deal with the problem by themselves.
Italy has lagged behind Spain and Ireland in restructuring its banks, analysts say, but an asset quality review by the European Central Bank is stinging lenders into action.
Non-performing loans at Italian banks, the ones least likely to ever be repaid, have reached 150 billion euros and are expected to keep rising through 2016, according to think tank Prometeia.
Visco said the proportion of bad debts, currently at a high of around 9 percent of all loans, was expected to remain stable over the next few quarters.
The only way to restore faith in the banking system in the eyes of ordinary people was through "decisive improvements to governance," and by increasing lending to firms and families, Visco said.
Italy seemed to be gradually emerging from recession, Visco said, but the recovery was "weak and uncertain" and entirely dependent on exports, with domestic demand still struggling.
He said he expected fourth quarter 2013 gross domestic product data, due next week, to show the economy had grown slightly for the first time since the middle of 2011.
Many Italian reforms approved by parliament had still not been put into practice, Visco said, underlining the inefficiencies of the public sector. ($1 = 0.7343 euros) (Additional reporting by Giselda Vagnoni, Gianluca Semeraro and Stefano Bernabei; Editing by Ruth Pitchford)