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(Adds details from sources, background)
MILAN, April 19 (Reuters) - The Bundesbank has rejected a request by Italian prosecutors to freeze assets belonging to Japanese bank Nomura and held in Germany, sources with direct knowledge of the matter said on Friday.
The prosecutors this week issued an order to seize up to 1.95 billion euros ($2.55 billion) from Nomura in accounts outside Italy following allegations that it colluded with former managers of Monte dei Paschi, the world's oldest bank, to set up huge hidden bets on Italian government bonds that have since helped drive the Italian bank close to collapse.
Nomura says it has done nothing wrong and would take all appropriate measures to protect its position.
The Siena prosecutors' first move was to try to block a Nomura account held with Citigroup in Frankfurt through "Target 2", the European interbank payment system.
The Bank of Italy contacted the Bundesbank over the prosecutors' request but the German central bank declined to do anything, two sources with knowledge of the situation told Reuters.
"The Bundesbank says that they cannot act through the channels indicated by Italian magistrates," one of the sources said.
A second source said the Bundesbank had not formally refused to cooperate with the Italian magistrates but that under German law it cannot enforce any such seizure request without a ruling by a German court.
Prosecutors in Siena would therefore have to make a formal request to the German authorities.
A spokesman for the German central bank said, "Any enforcement measures relating to the assets of a customer occur solely within the framework of a legally regulated procedure."
The seizure order was aimed at preventing Monte dei Paschi from sending more cash to Nomura as collateral for the "Alexandria" financial derivatives trade, a huge bet on Italian government debt that went wrong. Prosecutors say their move has frozen all payments related to the Alexandria trade.
The seizure warrant, seen by Reuters, says the magistrates are also seeking to freeze funds held on behalf of Nomura in London accounts with Citigroup and Bank of America . However, a source close to the probe said that no request has been made to the Bank of England.
Even before the prosecutors' seizure request Nomura had begun proceedings in Britain to try to establish British jurisdiction in its dispute with Monte dei Paschi over the Alexandria trade.
Monte dei Paschi has posted losses of 730 million euros from derivatives deals including Nomura's Alexandria and a similarly large trade called Santorini which was done with Deutsche Bank .
A judicial source told Reuters this week that the investigation into the Santorini deal was not yet as advanced as the probe into Alexandria.
Flavio Valeri, the head of Deutsche Bank in Italy, told Reuters on Thursday that the German bank had not been informed of any possible proceedings against it by the Siena magistrates. ($1=0.7644 euros) (Reporting By Silvia Ognibene and Stefano Bernabei; Writing by Silvia Aloisi; Editing by Greg Mahlich)