Trading in shares of the world’s oldest bank was temporarily suspended by the Italian stock exchange after the price fell 11% following a news agency report that the European Central Bank had refused it a lifeline.
Reuters, citing a banking source, said that the ECB had denied its request for two more weeks to find €5bn.
Under that scenario Italy’s third largest bank would face being wound down unless it received a financial bailout from the country’s government – itself in a state of disrepair following the resignation of prime minister Matteo Renzi after losing a crucial constitutional referendum.
Monte Paschi was due to hold a board meeting later on Friday ahead of government talks.
The savings of thousands of retail investors would be lost if it goes to the wall.
It is understood that the bank has been struggling to net the capital it needs because the political turmoil left investors reluctant to commit funds.
Italy has over 700 banks – many of them weighed down by tattered balance sheets.
The sector has an estimated €360bn (£300bn) of soured loans on its books. Of those loans, some €200bn (£170bn) is “non performing” – in other words, they are already in default or close to default, having been made to customers who are insolvent.
Of that exposure, an estimated €85bn (£72bn) has yet to be “written down”, meaning that the banks have yet to recognise the losses in their accounts.
Of Italy’s banks, Monte Paschi was seen as most vulnerable.
It has lost 84% of its market value since the start of the year and emerged as the worst performer from European Banking Authority (EBA) stress tests in July.
Shares in Italy’s other major banks were also hit on Friday including those in Unicredit, Italy’s largest bank, which has been looking to raise up to €13bn and offload bad debts.