* FY loss 3.2 billion euros vs f'cast 2.5 billion
* Sets aside 2.7 bln for bad debts incl 1.37 bln in Q4
* Also books loss on restatement of derivative trades
* Net interest income down 18 percent (Adds details on core Tier 1 ratio, deposits)
By Silvia Aloisi
MILAN, March 28 Italy's Banca Monte dei Paschi di Siena reported a wider-than-expected yearly net loss, after booking higher bad debt provisions and losses on derivatives trades which are at the centre of a fraud investigation.
The figures highlight the scale of the problems at Italy's third-biggest lender, which received a 4 billion euro ($5.1 billion) state bailout last month.
Its 2012 loss of 3.2 billion euros ($4.1 billion) compares with an average estimate for a loss of 2.5 billion in a Reuters poll of eight banks and brokerages and follows a 4.7 billion loss in 2011.
Monte Paschi said it had set aside 2.7 billion euros to cover bad debts, including 1.4 billion in the fourth quarter alone, as Italy battles through its longest recession in two decades.
The fourth-quarter figure was double the estimate of most analysts surveyed by Reuters and followed an industry-wide audit of bad debts by the Bank of Italy.
The Tuscan lender, the world's oldest bank, also booked a 730 million euros pretax loss due to the restatement of three derivatives trades carried out by its previous management, whose full impact was only recently disclosed.
"It's been a difficult year," CEO Fabrizio Viola, appointed in 2012 to turn around the bank's fortunes, told analysts on a conference call.
He said the review of the bank's financial portfolio had been completed and there were no more skeletons in the closet.
Analysts said the bank's capital base, stripping out the state bailout, remained weak, with one estimating a Core Tier 1 ratio of 6.9 percent - well below the 9 percent level required by the European Banking Authority.
Monte dei Paschi was hit hard by the euro zone debt crisis because of its large holdings of Italian government bonds and was the only Italian bank that failed to meet tougher capital requirements set by European regulators last year.
At the end of 2012 it had 25.8 billion euros of Italian government bonds - the highest amount among Italian banks relative to net assets.
The bank's problems deepened when losses from derivatives trades made in 2008 and 2009 began to emerge in January, prompting prosecutors who were already investigating it over the costly acquisition of a smaller rival in 2007 to widen their probe to those deals.
But even excluding the impact of those trades, the bank's 2012 accounts showed a weak bottom-line performance.
Revenue fell 6.2 percent in the year due to a steep fall of 18 percent in net interest income, a key measure of how much money a bank makes from its core business.
Gross non-performing loans rose 6 percent in the last quarter of 2012 to 7.3 billion euros, a level which Chief Financial Officer Bernardo Mingrone said was "undeniably high".
Customer deposits and securities issued dropped by 7.5 percent year-on-year, with the bank reporting a decline in current or checking accounts and short-term investments particularly from institutional clients.
This was half the rate of decline in customer deposits seen in the first nine months of 2012, but still underscored the challenges faced by the lender even before the derivatives scandal erupted this year.
Mingrone said deposits had taken a hit in February because of the bad publicity surrounding the bank, but recovered in March. He declined to give a figure for the level of deposits in the first quarter of 2013 or to comment on the outlook for net interest income and loan loss charges this year.
The bank also said costs had fallen by 3.7 percent on the year. The bank, which has announced 4,600 job cuts and 400 branch closures by 2015, said 1,660 employees would leave the company by the first half of 2013 and 200 branches had already been shut. ($1 = 0.7788 euros) ($1 = 0.7788 euros) (Editing by Elaine Hardcastle and David Holmes)