By Giuseppe Fonte and Stephen Jewkes
ROME/MILAN (Reuters) - Italy agreed on Tuesday to help Banca Monte dei Paschi di Siena plug a capital gap of between 1.3 to 1.7 billion euros, the first state aid offered to an Italian bank since the euro zone crisis deepened in 2010.
Rome said it was ready to underwrite special bonds worth up to 2 billion euros ($2.5 billion) issued by Monte Paschi - the world's oldest bank and Italy's third biggest lender. The European Commission had yet to approve the scheme, the government said in a statement.
The special bonds were similar to previous instruments known as 'Tremonti bonds' the bank used in 2009 when it was hit by the global financial crisis.
"Government intervention has been made necessary to meet commitments Italy made at the EU summit on Oct 26, 2011 and given the impossibility of Monte Paschi ... to resort to private solutions to strengthen its capital given current highly volatile market conditions," Rome said.
At the end of last year, the European Banking Authority said the bank needed to fill a 3.3 billion euro capital gap as part of a Europe-wide scheme to bolster domestic lenders in the face of the debt crisis.
The Italian bank has since plugged more than a half of this shortfall through better capital management, asset sales and other measures.
Rome said it would also replace 1.9 billion euros of outstanding Tremonti bonds with new securities, bringing state intervention in Monte Paschi up to 3.9 billion euros.
Monte Paschi is Italy's only major bank requesting government support in order to meet an EBA end-June deadline to reach the minimum 9 percent Tier 1 level capital ratio deemed sufficient to withstand certain financial shocks.
Other major banks such as Intesa Sanpaolo and UniCredit have managed to boost their financial base through cash calls carried out earlier on.
The Tuscan lender is expected to approve a thorough restructuring plan at a board meeting later in the day.
Spain has agreed in principle to a EU bailout scheme for its banks worth up to 100 billion euros.
(Additional reporting by Silvia Aloisi, Lisa Jucca and Stefano Bernabei, writing by Lisa Jucca; Editing by Andrew Heavens)