EU refuses to lower size of private cash injection for Veneto banks' rescue - sources

MILAN (Reuters) - The European Commission on Wednesday turned down a request to reduce a 1 billion euro ($1.1 billion) private capital injection for two ailing regional banks, needed to approve a state-backed rescue plan, four sources said.

The meeting between top managers of Popolare di Vicenza and Veneto Banca, Italian Treasury representatives and EU Commission officials turned out negatively, the sources said.

The Veneto banks, two of the country’s most under-pressure lenders, have asked for state aid to help plug a capital shortfall of 6.4 billion euros after loan writedowns pushed their capital below minimum thresholds.

The rescue plan envisages private capital being used, but last Friday a source said EU competition authorities had asked for an extra 1 billion euros in private money as a condition for giving a green light.

New EU rules for resolving banking crises aim to limit the amount of public money that can be used to save weak lenders by imposing some losses on shareholders and bondholders.

The sources said the two banks will now attend a meeting at the Italian Treasury on Thursday to assess the situation.

The EU Commission has never said the Wednesday meeting would be decisive.

The two banks and the Italian Treasury declined to comment.

Rome has set aside 20 billion euros to help its ailing banking sector, worried that any failures would destabilize the whole industry.

The two Veneto banks both failed to raise funds on the market last year and had to be rescued by a government-sponsored bailout scheme funded by other lenders and finance institutions.

A concern is that Italy’s stronger banks may now face fresh pressure to stump up more money to help rescue the lenders.

Carlo Messina, the head of Italy's biggest retail bank Intesa Sanpaolo ISP.MI, said on Wednesday healthy Italian banks should not be forced to spend more money rescuing weaker rivals.

The comments from one of Italy’s most influential bankers highlight frustration among the country’s lenders which have spent about 8.5 billion euros since the end of 2015 bailing out ailing competitors.

Messina also criticised European authorities for taking too long to approve state aid for the two lenders and their bigger rival Monte dei Paschi di Siena BMPS.MI.

Talks with the two Veneto banks over how to bail them out have been bogged down for months.

Reporting by Andrea Mandala, Paola Arosio and Stefano Bernabei, writing by Stephen Jewkes, editing by Isla Binnie and John Stonestreet