* UniCredit CEO sees no risk of hostile takeover
* UniCredit CEO contacted about possible merger plan, rejected it-source
* Italian press say UniCredit vulnerable, foundations worried
* Merger seen bolstering UniCredit defence, but would face many hurdles
By Paola Arosio and Silvia Aloisi
MILAN, Nov 5 Italy's biggest bank by assets denied on Monday there were any plans for a tie-up with rival Intesa Sanpaolo after sources close to the matter said UniCredit chief executive Federico Ghizzoni had been sounded out on the issue.
A source close to a UniCredit shareholder told Reuters the chairman of Intesa's supervisory board, Giovanni Bazoli, sent a friendly banker to discuss a tie-up with Ghizzoni but that he had rejected the idea.
A second source said a project for a possible merger between Italy's two biggest banks "exists" but that there was no guarantee it would materialise.
"Feelers have been put out over the past few days to see what the reaction would be," the second source said.
That followed a report in Italian newspaper Corriere della Sera last week that has spurred a media frenzy over the issue and a series of denials by officials from both banks.
"No, this is folly," Ghizzoni told reporters on Monday when asked whether UniCredit could fall prey to a hostile bid either now or in the future.
"We are going ahead on our own," he added, in response to a question about a possible Intesa merger.
Italy's banks have taken a hammering from a debt crisis that has slashed the value of the swathes of Italian and other euro zone government bonds they hold while also forcing hefty cuts in spending that have helped drive Italy itself into recession.
Both Intesa and Unicredit have unveiled sweeping job cuts and seen their combined market value dive to just over 40 billion euros, well below that of European rivals.
According to the first source, Bazoli's overture was backed by the powerful head of ACRI, an association bringing together the foundations that are core shareholders in Italy's leading banks.
Those foundations have seen their stakes in UniCredit diluted by a 7.5 billion euros capital increase earlier this year at the expense of foreign investors including Abu Dhabi investment vehicle Aabar and Pamplona Capital Management.
The source said the foundations feared that UniCredit could be snapped up by a foreign bidder the moment it becomes clear the euro zone has got a grip on its debt crisis and Italy's problems are not going to spiral out of control.
"What they wanted to do is save UniCredit, which is potentially vulnerable to foreign interests," the source said, adding that a merger with Intesa was regarded as a way to bolster UniCredit's defences.
"But it's impossible, it doesn't fly. There'd be antitrust problems and it would not be easy to find a buyer for UniCredit's Italian network," the source said.
Intesa management board chairman Andrea Beltratti declined to comment on the merger speculation on Monday. At the weekend, Intesa's CEO Enrico Cucchiani poured cold water on the issue, telling Il Sole 24 ore daily it was "much ado about nothing."
UniCredit is Italy's most internationally-oriented bank, with operations in 22 countries, and a strong position in Germany, Austrian and eastern Europe. Intesa is Italy's biggest retail lender and makes 80 percent of its revenues in its home country - compared to less than 50 percent for UniCredit.
But UniCredit's shareholder structure is more fragmented than Intesa's, making it potentially more vulnerable.
The main foundation shareholders in UniCredit have a combined stake of just over 10 percent, compared with around 16 percent for the bank's three largest investors - Aabar, Pamplona and the Libyan government.
"The foundations no longer have a big enough stake to defend the bank, but I can't see which other foreign lender, particularly in Europe, would want to buy UniCredit, given they all have their own problems and are in the process of deleveraging," said Fidentiis analyst Fabrizio Bernardi.
"A merger with Intesa seems science fiction. With their market share in Italy, one of the two would have to get rid of the domestic retail network, at a loss," said Bernardi, who like other analysts was deeply sceptical about the merger speculation.
Intesa has a 16 percent market share in Italy and is already merging or shutting 1,000 branches, or a fifth of its domestic network. UniCredit, with a 13 percent market share in Italy, has closed 800 out branches as part of its own restructuring plan.
Both banks have also announced 11,000 job cuts in total as they seek to cut costs and restore profitability.